22 February 2018
So you’ve taken the leap. You’ve finally plucked up the courage to be your own boss and pursue your dream of setting up your own business.
Whatever your goals or aspirations, you can guarantee there is going to be a series of tricky decisions to make in the initial stages.
One of the most important choices you'll make when setting up your own business is deciding what type of business structure you want to follow. Not only will it affect admin and overhead costs, but your legal liability and the amount and way you pay tax will be determined by your company's structure.
We’ve put together a quick overview of each to help make that decision a little easier…
Sole trader
As a sole trader, you’re fully in charge of your business. Essentially the business and the owner are the same as sole traders are not seen as separate entities by law – therefore you are subject to unlimited liability, meaning if the business gets into debt you as the owner are personally liable.
You’ll need to complete and submit an annual Self-Assessment tax return, by registering via the government gateway on the HMRC website. After paying your tax, you retain all the profits and there is generally less ‘red tape’ involved in comparison to other structures.
Your business information will be private as there is no requirement to file any information publicly Companies House and you’ll have full control of how your business is run.
Partnership
Partnerships are similar to sole trader setups, with the exception that they have more than one person sharing the responsibility of the business. Profits are split between each partner in the agreed profit sharing ratio as per the signed partnership agreement and they are each responsible for paying their own tax.
An annual partnership tax return must be filed at HMRC to show the distribution of profits, in addition to submitting a personal tax return for each partner.
Limited Liability Partnership (LLP)
An LLP is a separate legal entity from its partners. Think of it as a half-way-house between a partnership and limited company. Partners are not personally responsible for the debts of the business, and the liability of each partner is limited to their investment in the business.
Annual accounts of the business will need to be submitted to Companies House which can be completed by a competent accountant.
Limited company
A limited company is a separate legal entity by law which has been incorporated at Companies House, it provides limited personal liability to the owners of the business to the extent of the capital invested.
Limited companies pay 19% Corporation Tax (as of 1 April 2017) on all taxable profits and must be registered with Companies House. They are separate legal entities and offer owners a greater degree of protection in comparison to other business structures.
However, they do come with more reporting requirements. Bookkeeping and accounting can be more complex and limited companies are legally required to prepare and submit annual accounts through accurate record keeping.
With this option, directors have the choice of paying themselves a combination of salaries and dividends which are a far more tax efficient way of extracting money from your business.
Sole trader, partnership, LLP or limited company - which is best?
When it comes to structuring a business, there is no one size fits all solution. Each structure has its own advantages and disadvantages, so it is vital that you fully understand what each can offer and which would be best for you and your business.
If you’re still struggling to make sense of it all, get in touch with our business services team and we can help assess which is the best option for you.
