You’re ready to start your business. Website, marketing plan, product or service, strategy – it’s all there. But, wait. Have you thought about what business structure to choose? This is an important decision and will be pivotal in how you pay tax, how your company is perceived and the structure you choose will leave you with certain obligations you must adhere to.
There is no right or wrong answer – different business structures are more appropriate than others depending on your line of work, and how you want to run your business.
Let’s take a look at the options.
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Sole Trader
A Sole Trader (also referred to as self employed), will need to register for self assessment Tax with HMRC as soon as you start trading.
You’ll still have legal responsibilities as a sole trader, including paying Tax via Self Assessment, but you are entitled to keep all of the profits you make.
However, it is important to note that you are solely responsible for any debt that you obtain through the business.
You can also employ staff as a sole trader.
Although you are free to submit your self assessment tax return yourself, it is advisable to use an accountant to help you through the process. Accountants will have detailed knowledge about key information and liabilities, what you can and can’t claim as expenses as well as other advice you’re certain to find valuable.
This option is a low cost solution to starting a business, with fewer legal responsibilities. Suited to tradespeople, or freelancers.
Partnership
A partnership is similar to that of a sole trader, but the ‘partner(s)’ share the profits, ownership and liabilities.
On registering with HMRC, you’ll have to name a ‘nominated’ partner who will have the responsibility of maintaining accurate records and tax returns.
Like sole traders, each of you will need to prepare and submit a tax return, and pay tax on profits made.
It’s important to consider the impact a partnership may have on personal relationships, and that you’ll both be fully responsible for managing the company and any debt that you incur.
Limited Liability Partnership
Similar to a partnership but with more of a legal structure, this option is open to many partners being in the business, however two need to be nominated as ‘designated members’ with the responsibility of filing annual accounts.
A LLP isn’t taxed as an entity, so the tax is shared between it’s members via income tax returns.
LLP is also similar to a Limited Company, In that your personal financial investments are protected by the entity, giving the members ‘limited liability’.
This is a good option for partners that want to have an amount of protection, with less tax burdens.
Incorporating a Limited Liability Company
Setting up a LTD Company comes with more legal and tax responsibilities than other formations.
You’ll need to register the company with HMRC, including details of shareholders and directors (you can be both a director and shareholder) and the company will be liable to pay tax on profits, as well as company directors having to pay income tax via self assessment.
You will need at least one Director, and one Shareholder.
You’ll also need to provide details of the companies name, registered address, details of how the shares are being distributed and the rules about how the company is run (Articles of Association).
As the director of a LTD Company, you’ll have legal responsibilities about how the company is run, and tax liabilities to consider.
You’ll need to prepare and file annual company accounts, and pay corporation tax on the profits of the company.
Your accountant will be able to guide you through this process effectively, ensuring you are paying yourself In the most tax efficient way possible as a company director, and advising how to reduce your corporation tax bill.
It’s important to bare In mind there will be set up costs, and a legal structure in which you’ll need to run your business. Late submissions on accounts and secretarial duties will incur fines, and there will be a certain way you’ll have to conduct yourself as a company owner.
In summary, when deciding which type of structure you want to set up your business in, it’s important to understand the tax and legal liabilities of each option, and ask your accountant for advice on what may be most suitable. Your accountant will also be able to give you insight into what tax benefits are available in each structure, depending on the estimated turnover, growth and plans you have for the business.
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