There are a number of factors to consider when choosing a structure for your business. So it helps to get an accountant’s advice.
Deciding on the structure of your business is one of the most important decisions you make when you first start out as it affects your legal responsibilities, how the general public and the market view your business, administrative burden, liabilities and the tax you pay, both direct tax (ie income tax, corporation tax etc) and indirect tax (ie VAT, stamp duty etc).
But, although all types of business structure have advantages and disadvantages, the good news is that you can switch to a different structure at a later date if the one you pick at the outset no longer meets your requirements. It is essential that you discuss this with your business adviser/accountant.
When structuring your business, the main options are:
- Sole trader
- Limited company
This is the simplest way to run your own business as you don’t have to pay registration fees and it is relatively easy to set up. Red tape is kept to a minimum since you just need to record your income and expenses, register for self-assessment with HM Revenue & Customs (HMRC) and complete an annual self-assessment tax return. A business needs to inform HMRC within three months of starting business.
However, you are personally liable for any debts that your business runs up and this structure will probably not be the most tax-efficient one for businesses with a turnover of over £50,000.
In a partnership, two or more people (the partners or members) share the risks, costs and responsibilities of being in business with the profits normally distributed among them.
Limited liability partnerships offer greater legal protection to partners than an ordinary partnership. This is because a partner’s liability is limited to the amount of money they have invested in the business. But, unlike ordinary partnerships, limited liability partnerships have to send an annual return to, and file accounts with, Companies House.
Partnerships, both incorporated and unincorporated, are transparent entities for tax. Though the partnership has to submit a tax return, tax is only paid individually through the partners’ own tax returns.
Private limited companies have the letters ‘ltd’ after their name. They offer greater legal protection to their owners than either sole trader businesses or partnerships since they are legal entities that exist in their own right.
Companies must take responsibility for their own finances and shareholders are not responsible for a company’s debts unless they have provided guarantees – for example, against a bank loan.
Companies must be registered (incorporated) at Companies House and they must file annual accounts and confirmation statements with Companies House. In addition, the accounts may require to be audited if the audit threshold is breached.
There are also public companies that have the letters ‘plc’ after their name. These companies can be listed on stock exchanges such as the London Stock Exchange or the Alternative Investment Market and their shares can be bought and sold by the general public.
There are further restrictions such as a shorter filing deadline, minimum share capital. Careful consideration must be given before incorporating as a plc.