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Which Business Structure is Right for You?

When people start businesses they are full of enthusiasm about their products, services and how they are going to make their future customers happy. They are all excellent ingredients of essential planning. Another aspect of planning is choosing the right business structure. This is the legal structure through which a business operates and there are several structures to choose from and implications to consider. The most common are:

Limited Company

With this structure the owner(s) have shares in the Company which generally give them 3 rights:

  • to vote on decisions
  • to receive a share of the profits (known as a dividend)
  • to share in the capital (money) of the company when it is wound up or assets sold

There can be tax advantages of operating as a Limited Company if profits are high enough. A Company is also a separate legal entity to the individual owners, so it limits liability in the unfortunate event of a legal claim against the business. Some people believe a Company is a more credible structure than some of the others, but that is subject to personal opinion.

There are some legal obligations that come with this structure in terms of accounting and tax reporting.  A qualified accountant is needed to ensure that these obligations are met for you. A Company prepares Annual Accounts and a Corporation Tax Return each year and pays Corporation Tax on any profits once a year (9 months after the year-end). An Annual Return is updated and filed with Companies House each year too.

If you are looking for outside investment into your business a Limited Company is usually the best structure.

A company can be formed in 24 hours. It is vital that it is set up correctly and appropriate registrations are made with Companies House and HMRC. It is a bit more complicated to stop (dissolve) a Company and this process takes at least 3 months.

Sole Trader

This is the simplest business structure. An individual can register with HMRC as a Sole Trader very easily. They can also stop trading very easily. The onus is on the individual to report their business accounts via their personal tax return each year to HMRC.

The business and the individual are considered to be one legal entity. There are potential risks here in the event of a legal claim against the business as personal assets e.g. a house, are at risk.

There can be tax advantages of this structure in the early days of a business, particularly if it is expected to be loss-making initially or generate only small profits. There can also be tax disadvantages though, so do discuss with an accountant before setting up.

A business can start as a Sole Trader and incorporate (change to a Company) at a later date.

Partnership

With this structure two or more individuals can own a business together. Just like with Sole Traders, Partnerships are not separate legal entities to the individual Partners, so the lack of limited liability can be an issue. Additionally, each Partner is 100% responsible for any liabilities such as debts and not just responsible for their share of any debts.

Partnership Accounts and Partnership Tax Return have to be prepared. The information contained in these provide the information needed for each Partner’s own personal tax return.

Tax efficiency needs scrutinising to establish if it is the best structure for the Partners involved.

As with a Sole Trader business, a Partnership can incorporate at a later date.

Limited Liability Partnership (LLP)

This is a special kind of Partnership which is recognised as a separate legal entity to the individual Partners (or Members as they are known in this structure). Unlike a Limited Company though it is not taxed as a separate entity. Each member is taxed on their share of the profits. For this reason it is not always the most tax-efficient structure for the individuals, but tax is not the only consideration when forming a business.

So which Structure is Right for You?

Sometimes running a business requires the use of a crystal ball! Getting the structure right up front is important and peering forward into the future can really help. Some questions that will be raised in helping you to make that decision are:

  • Do your customers request a particular structure to be able to buy from you?
  • How much profit do you expect to make each year?
  • Will your business want investment in the future?
  • What is your exit strategy?

Is there any reason you would want to be taxed personally on the profits of your business?

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