When you’re starting up a business, and particularly if it’s your first-time, the legalities can be confusing. Your idea may be sound and you have the ambition, but do you know which legal structure you should choose?
Everything, from the way you pay tax, make decisions and how your business grows, depends on the legal structure of your business. You must decide at the outset of your business but bear in mind you can change it later if it becomes necessary.
Popular business structures
The most popular business structures in the UK are:
- Sole trader.
- Partnership
- Limited company (Ltd)
- Limited liability partnership (LLP).
Each has advantages and disadvantages, depending on the size and nature of your business. We’ve broken them down below to help you decide.
Structure: sole trader
This is the simplest structure, and very popular with start-ups. There’s little red tape, no registration fees to pay and you remain in control of your business decisions. You keep all profits from your business, after paying tax. If you want to employee people then that’s an option, as long as you follow employment law and tell HMRC.
On the down side, your personal and business finances remain legally entwined. This means that if your business is sued or incurs debts, you must meet any liability from personal funds. In this way, the sole trader structure exposes you to more personal risk than others, so is not ideal for a high-cost start-up or indeed any business which might bring with it the risk of being sued.
Sole traders must pay income tax on profits (instead of corporation tax), which means that profits above £45,001 are taxed at 40%. The next stage is profits above £150,000, which are taxed at 45%. You’ll also need to pay Class 2 National Insurance (NI) contributions and possibly Class 4, depending on your profits.
Structure: partnership
This is a similar structure to sole trader, except that there are at least two people involved. There is no limit to the number of partners, although larger ones can be more difficult to manage.
All partners sign an agreement to legally establish the business ownership, how profits and liabilities are shared out and how people can leave the partnership. Each partner must register as self-employed and file a separate tax return, with tax and NI similar to those imposed on sole traders.
This is a simple and flexible business structure, and you have more than one person to shoulder the business. The main disadvantage is that all partners hold joint responsibility for business debts, so if one partner is sued then all partners must pay.
Structure: limited company
If you choose to incorporate your business as a limited company, you must register at Companies House. This creates a separate legal entity, with finances legally separate from your personal. As such, it’s less risky in terms of personal exposure, and if the business goes down or runs into legal trouble, then you are only personally liable for the notional value of your shares in the company.
Another advantage of this structure is that companies pay corporation tax of 19% on their profits. This is generally much more tax-efficient than paying income tax, particularly for higher-rate taxpayers. As a director you could take income from the company as a salary or dividends, which will be taxed separately.
However, there is far more administration involved with a limited company. You will probably need a company secretary and an accountant although not obligatory. An annual company tax return and full accounts must be submitted every year to the HMRC. You will also be responsible for paying income tax and NI for employees.
Structure: limited liability partnership
LLPs are popular with professional services including legal firms and accountants. They are similar to ordinary partnerships in many respects, but with limited liability. An LLP must be registered at Companies House, and at least two partners must take responsibility for filing annual accounts.
Each partner must register as self-employed and file a separate tax return. If the business fails, each partner is only liable for their share as stated in the Partnership Agreement. There is more administration involved, in a similar way to a limited company. You will probably need an accountant and company secretary, although you’re not legally obliged to have one.
We can help discuss the most suitable structure for your business. Contact Turner Little here.
About Turner Little
Founded in 1998 in Yorkshire, UK, Turner Little is a specialist UK and offshore company formation, banking and corporate services provider. Our services include company formation, UK and offshore banking, asset protection, credit correction/repair, trademarking and trusts. Other services include Internet services, mail forwarding, wills and probate. Turner Little’s vision is to offer the best possible service, together with market leading products.
For more information, please contact us on 01904 783101
