Which Business Structure is right for you?
There are four primary options for a business structure in the UK, but it’s essential that you consider carefully which is best for you BEFORE you start trading. Each has its own set of advantages and disadvantages. In this post we’ll lay out the key differences.
Please be sure to get advice around your own situation and circumstances before making a final decision.
What are the options?
- Sole Trade
- Limited Company
- Limited Liability Partnership (LLP)
Each has its own set of advantages and disadvantages. In this post we’ll lay out the key differences. Please be sure to get advice around your own situation and circumstance before making a final decision.
This is how a lot of businesses start out. A sole trade is essentially an extension of an individual, so it’s a common structure for people trading on their own. Think of hairdressers and therapists, some trades, even some accountants!
The benefits of trading as a Sole Trade are the flexibility it offers as you can essentially do what you choose to, without the restrictions of the other structures.
There is a risk attached though! If something goes wrong, there is no separation between the business and the individual, so any assets owned by the individual are at risk. This can include your home, car and any personal savings. This is called Unlimited Personal Liability.
One of the key steps to take if you are going to trade as a Sole Trader is to have an entirely separate business bank account. Everything relating to the business should go through here. HMRC love to see the opposite, so keep things separate and know that they can only look at the business records.
You would also be very wise to make sure that any income at all, whether business related or personal, is carefully recorded. This includes things like inheritances, where HMRC may question where the amounts came from and attempt to claim that they were business income.
The individual is responsible for notifying HMRC that they have started to trade and for declaring their income and tax payable through the submission of a Self Assessment Tax Return by 31st January each year.
In many ways trading as a Partnership is very similar to a Sole Trader, other than there being more than one person involved.
Each Partner has the right to enter into contracts on behalf of the Partnership. Each Partner is also jointly liable for any losses made by the Partnership. Again, there is no limit to the liability of the Partners should something go wrong. Each can be pushed for the full amount of any debts.
You should always make sure that you have a robust Partnership Agreement in place before you start to trade. We would strongly advise that this should be drawn up by a Solicitor. It will protect each party in the event of a breakdown in the relationship in the future, or any unforeseen circumstances.
The Partners are each reponsible for paying the tax due on their proportion of any income through the submission of a Partnership Tax Return. The income flows into the Partnership pages of their personal Self Assessment Tax Returns and is paid by the individual.
This is the first business structure that is a separate entity, where it will live on after the deaths of its Directors. It is therefore essential that you have a Shareholders Agreement in place that will decide what happens in this or any other event. As before, we would strongly recommend that this is prepared by a Solicitor.
A Limited Company also confers limited liability on its Directors, so their personal assets are protected in the event that the Company fails. This is one of the reasons why Limited Companies are so popular, but there are other considerations too:
- The Directors have responsibilities to the Company before their own interests, and must act accordingly. They must also answer to Shareholders, who may not just be the Directors.
- A business that is a Limited Company is often perceived to be more established and potentially more credible than a Sole Trade, as it is more visible through the records that have to be submitted to Companies House. These are on public record and accessible online.
- A Limited Company requires more detailed records to be kept, and is more expensive to run, as costs, including accountancy, are higher.
- There are more restrictions on how the Company can act, which will be laid out in its Memorandum and Articles of Association. It is also governed by the Companies Act.
- A Company must also clearly communicate that it IS a Limited Company whenever it corresponds with another party, as well as on it’s website and emails.
- Regular submissions must be made to Companies House and HMRC, and there are penalties for missing these.
As a separate entity, the Company makes its own submissions to HMRC, in the form of a Corporation Tax Return, and from there, pays its own Corporation Tax.
Limited Liability Partnership (LLP)
As with a Limited Company, an LLP is a separate legal entity in its own right. Rather than Directors, an LLP has Members, who both own and manage the business.
As with a Partnership, as detailed above, the profits are shared between the Members.
An LLP is also registered with Companies House and operated in a very similar way to a Limited Company.
How do I decide which Structure to choose?
Your decision should be based around:
- The most suitable finance structure.
- Your preferred level of administration.
- Whether you need the increased credibility of being a Limited Company.
- Whether you’re happy with the business records being on public record.
- What are your long term plans for the business?
Investing time in a conversation with a professional advisor before you start a business can be hugely worthwhile later.
Similarly, if you are considering making any change to the legal status of your business, please be sure to take professional advice. Whilst moving from a Sale Trade to a Limited Company, for example, can be straight forward to do, there are important tax considerations to doing so. These can result in large tax liabilities if the timing of the change isn’t planned.
If we can help you clarify which Business Structure to choose, please do get in touch.