Whether you’re entering a period of growth or starting things anew, choosing your business structure is one of the most important decisions to make.
Not only will it dictate the way you pay taxes, but also how you make vital business decisions. Not every business will benefit from the same structure, so it’s important to know the facts before diving in.
Here’s what you need to know about the various business structures.
Your main options
When it comes to running a business, there are three main routes to take in terms of structure:
- sole trader
- limited company
Each option has its advantages and disadvantages. The bulk of your decision-making will fall on the way you want to run things, as well as the control you want over the business.
But which is best for you?
As a sole trader, you and your business are essentially a single entity. You are your business. This means you’ll have full responsibility for the vital business decisions you’ll face.
Because your finances and the finances of your business are the same, any debts or losses you incur will fall on your shoulders. That said, any profits you make will also be 100% yours (after tax, that is).
Talking of taxes, as a sole trader, you’re legally obligated to file a self-assessment tax return every year. This will include all of the income your business receives, as well as any eligible expenses you’ve accrued over the tax year. You’ll pay income tax on your profits – the more you earn, the more you’ll pay.
A lot of people decide to operate as a sole trader as it means they’ll maintain full control over their brainchild, even if it means being financially liable. Not only that, but it’s the easiest way to start a business.
Limited liability company
Where being a sole trader means you’ll be liable for your business’s finances with more control, a limited company means almost the opposite.
By registering with Companies House, you’ll be separating yourself from your business in terms of financial liability (not completely, though). The company’s debts or losses won’t come directly out of your pocket. Instead, you’ll only be legally responsible for debts to the extent of your investment.
When first setting up your company, you’ll pay an initial set-up cost. From there you’ll file annual accounts and returns with both Companies House and HMRC. You’ll also need to register for corporation tax and pay your bill annually.
One attractive benefit of being a director of a limited company is that you can pay yourself in a tax-efficient way.
By taking a wage made of dividends and a salary, you’ll be able to pay yourself under the personal allowance and top it up with dividends, which have a lower tax rate.
There are two main types of partnerships – a regular partnership and a limited liability partnership.
The first requires two people to share responsibility for the business and share the profits. Each partner will pay income tax on their share.
Between you, you will nominate a partner to record and file the business’s tax returns. Each individual partner, though, will have to file a separate self-assessment tax return for their income.
Much like a sole trader, each partner will have full liability for the financial aspects of their business.
A limited liability partnership works similarly to a limited company, where each partner will only have financial liability to the extent of their investment. You’ll also have to register with Companies House, so the statutory accounts will be part of your admin work.
As with any major business decision, each structure has pros and cons. You’ll need to make sure you choose the one that makes the most sense for your business. This could be in terms of tax payments or even internal control.
We believe you shouldn’t take these choices lightly. That’s we offer our professional and impartial advice to clients asking themselves the same questions.
If you’re still trying to decide on the best structure for your business, we’d be happy to help. Get in touch.