Choosing the right business structure is important. Not only does it affect your exposure to financial risks and day-to-day administration, but it can be instrumental in helping you grow and succeed in your new venture.
You’ll probably know whether your new business is something you’ll be starting on your own, or with help from business partners. In either case, you’ll need to decide what sort of legal entity best suits the structure of your business. It could be working as a Sole Trader, setting up in Partnership, a Limited Liability Partnership, or registering as a Limited Company. An accountant and a solicitor can help you look at the differences – and the pros and cons of each one - in greater depth.
This is the most straight-forward structure, and sometimes thought of as being the easiest to run on a day-to-day basis, but it is really only suitable for smaller businesses. You will be self employed, you won’t need to pay any registration fees; and record-keeping and bookkeeping should be relatively simple (so long as you are organised). As a self employed person, you will have to submit a self assessment tax return to HMRC each year. And should the business fail, you’re also personally liable for any debts that your business builds up.
Each partner is considered to be self employed (and should notify HMRC of this) and rather than the business having to submit accounts and tax assessments to HMRC, each partner will be required to prepare a personal self assessment tax return annually. To prevent problems further down the line, it’s a good idea to draw up a written agreement called a partnership agreement outlining the division of the business between you. A solicitor can help you decide how profits (or debts) should be divided and can look at what happens if a partner wants to leave or dies. It is important to remember that, as a partner in a business, a creditor can make a claim on your personal assets if debts are built up – even if those debts have been run up by your partners.
Limited Liability Partnerships (LLPs)
This has similarities to Partnerships, in that the partners are considered to be self employed and it would be usual to have a deed of partnership setting out the business relationship between the partners. Partners submit personal self assessment tax returns to HMRC, but the business itself has no tax liability. But LLPs also have some of the characteristics of limited companies, as they need to be registered at Companies House, with the various administrative requirements that entails, both at set up and ongoing, and ‘limited liability’ means that the debts of the business are not the debts of the partners - so (providing the business has been run lawfully and sensibly) creditors will not be able to claim against your personal assets. LLPs are the structure used for firms of lawyers and firms of accountants, but there are plenty of other kinds of business that have also chosen this structure.
In many business sectors, people wish to deal with limited companies as they are dealing with a corporate entity, not individual shareholders and a limited company’s finances are considered separate from those of its shareholders. This means that, if your company runs up debts, no one can make a claim on your personal assets. Profits from your company can be distributed to shareholders (although you could be the sole shareholder in your company), in the form of dividends - or you could leave profits in the business as working capital. Your company will have to submit accounts and corporation tax returns – and the chances are that you will have to prepare a personal self assessment tax return each year to report to HMRC on your salary (if your company pays you one) and any dividends the company pays to you.
There’s more administration involved with both limited companies and limited liability partnerships, so it’s important to find an accountant and an IFA to advise you on which records to keep, what level of detail is needed, what needs to be sent to Companies House and how best to organise your business’s finances.
Getting advice on your company structure
A solicitor or accountant can give you in-depth details explaining the differences between each legal entity and can help you set up your business structure, and any legal documents needed, such as partnership agreement or shareholder agreement. An IFA or accountant can tell you the financial risks would be for you as an individual and how to plan your money. They will also be able to help with tax matters – whether they are your personal taxes or those of the business. Use our search tools to find an expert in your local area.
Questions you might like to ask the experts…
- Can you set up my business for me?
- What are the fees involved in setting up a limited company?
- What business records do I need to keep and how long for?
- Do I have to register for VAT as a limited company?
- Are there tax advantages to trading as a limited company, rather than a Partnership?
- What tax returns will I have to make – either for myself or for my business?
- As a sole trader or partner, when do I need to inform the tax office that I’m working for myself?