Thinking of starting a new business?
The fundamental first thought when starting up a business is the decision on how to structure your business. The structure of your business depends on your personal situation and your future plans. The decision you make will have an effect on the way you are taxed and your exposure to creditors.
There are four structures to consider:
- Sole Partnership: This is when you run your own business as an individual and classed as self-employed. This also means you can keep all your business’s profits after you have paid tax as well as, being personally responsible for any losses your business makes.
You need to register as a Sole Trader you need to have earned more than £1,000 from self-employment between 6th April 2017 and 5th April 2018. If you need to prove you’re self-employed for example, to claim Tax Free Childcare. Also, if you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits.
If you are a sole trader you have certain responsibilities that you need to do oblige to:
- Keep records of your business’s sales and expenses
- Send a Self Assessment Tax Return every year
- Pay Income Tax on your profits and Class 2 and Class 4 National Insurance which you can use HRMC’s Tax Calculator to help you budget for this.
Sole Trader businesses can not include ‘Limited’, ‘Ltd’, ‘Limited Liability Partnership’, ‘Public Limited Company’ or ‘PLC’.
- Limited Company: A limited company is a business that is structured by incorporating Companies House as a legal ‘person’. This type of business is completely separate from its owners and can enter into contracts in its own name and is responsible for its own actions, finances and liabilities.
As a director of a limited company you need to follow the company’s rules and must:
- Keep the company records and any report changes.
- File any accounts and your Company Tax Return.
- Pay Corporation Tax.
- Tell all shareholders if you might personally benefit from a transaction that the company makes.
- Register for Self Assessment and send a personal Self Assessment tax return every year. (You do not need to register for a Self Assessment or send a tax return if you are a non-profit organisation).
Advantages of a Limited Company
- Limited Liability: Being a Limited Company allows you to have financial security and the company’s shareholders will only be liable for any debt the company has according to the levels of their own investment.
- Tax Advantages: Limited Companies are only taxed on their profits and do not get taxed the higher personal tax rates places on sole traders or partnerships.
- Employee Shareholders: Employees can purchase shares and become shareholders of the company. Employees will have an interest in seeing the business succeed as well as having a say in how it is run.
- Ownership and Control: In majority of circumstances the directors are usually the main shareholders therefore both ownership and control is in their hands.
Disadvantages of a Limited Company:
- Cost: Majority of people believe that a Limited Company is expensive to set up however this is not true. Some can be set up for free.
- Complex: There are more complex and restrictive rule formed by the government when doing accounts and bookkeeping compared to being a sole trader. Being a Limited Company, you are expected to produced years accounts.
- Restricted Capital Raising: There is a restriction on raising of capital via sales of shares.
When it comes to naming your private limited company, different rules apply compared to sole traders and business partnerships. You cannot have the same name as another registered company’s name as well as it not being similar to another company’s name.
- Limited Liability Partnership: This legal structure is typically used for all business sizes that sit between a traditional partnership and a limited company. To set up a limited partnership you must have one general partner and one limited partner. The difference between the two is that they will have different responsibilities within the business and different levels of liability for any debts that the business can’t pay.
Advantages of a Limited Partnership:
- Tax Benefits: A Limited Partnership is different to other legal structure as the partners within the business get to share the profit and losses but they do not have to participate in the business itself.
- Liability Limits: The partner’s liability for the partnership’s debt is only limited to the amount of money or property that individual partner contributed to the partnership.
- No Turnover Issues: The Limited Partners can be replaced or reave with the limited partnership being over.
Disadvantages of a Limited Partnership:
- Risk to General Partners: Within a limited partnership, the general partners carry the burden of all the business’s debts and obligations. In the unlikely circumstances that the business is sued or enters into debt, the general partners are responsible.
- Compliance Challenges: A general partnership requires less paperwork than a corporation. However, because you have limited partners you still need to hold annual meetings and create detailed agreements.
For any help and support contact us or visit HMRC.