Which business structure is right for you? This can influence the tax paid, your liabilities and level of regulation.
One of the first questions anyone starting a new business will need to quickly address is the legal structure for that business. For many, it will be a simple decision. But for those with ambitious growth plans a little more thought will be needed.
Sole traders
The sole trader or self-employed route will for many small or micro businesses be sufficient. Sole traders will need to register with HMRC as soon as they start trading. As a sole trader you can keep all of your profits after tax but you will be personally liable for any debts incurred.
Sole traders will need to pay National Insurance and income tax on the profits generated.
Limited company
One of the most common routes for businesses, limited companies offer business owners a greater degree of protection. The difference between Limited company and Sole Trader and Partnership; a limited Company is a legal separate entity in its own right. A limited company must have at least one director and one shareholder, who can be the same person.
Limited companies do incur set-up costs and have ongoing compliance and reporting obligations that can be time-consuming.
Partnerships
As the name suggests, a partnership is where you and your partner/partners are responsible for the business, sharing profits and with each partner being taxed on those profits. A limited company can be considered as a partner in a partnership.
Partnerships will need a Partnership Agreement that sets out liabilities, ownership, how profits are shared, and what happens if a partner wishes to exit the partnership. Partnerships are a popular option for professional practices.
One of the downsides to a partnership is that individual partners are personally responsible for the liabilities and debts of the business. A Limited Liability Partnership offers individual partners greater protection but attracts greater reporting requirements.
If you are looking to start a business and would like advice on the right structure, please do get in touch with James Johnson on the details below.
