Whether a cafe, restaurant, building contract or consulting opportunity opening up a new business is an exciting venture. Choosing name, trade location, dealing with banks will all take up your attention, but one of most important things you have to decide is what kind of business structure would suit your needs the best. In this article we explore different types of business structures available and in what circumstances fit the best.
As there isn’t one structure that fits all, you should give it some thought and carefully considered which type is right for you. There four main types of business in UK you can choose from:
- Sole trader
- Limited liability partnership (LLP)
- Limited liability company (LTD)
Each type of business differs in terms of the paperwork you must complete, the tax you must pay, the way in which profit is distributed and your personal responsibilities if the business makes a loss.
Below you will find the overview which will help you to have more understanding of the differences, but please remember that if in doubt, just contact us and we will guide you through the process.
In case of sole trading, the business is owned and managed by one individual. It is ideal for someone who likes the freedom of making the decisions and have a full control in the business. You are your own boss but you are also responsible for all aspect of running the business.
One of the advantages of becoming sole trader is that it is very easy to set up. All you have to do is tell HMRC you’re staring a business as sole trader. You won’t have to fill in any complicated paperwork and can start trading without delay. There are relatively low running costs, but you have to remember that you are responsible to keep all records, filing the personal tax returns and paying your taxes on the profit of the business.
In comparison to employment, one of the benefits is that you can claim the expenses against the income, which effectively lower your tax bill.
You have to bear in mind however that being sole trader means there is no legal distinction between you (the owner) and the company. The owner has ‘unlimited’ liability in case of debt, of which will be liable personally. If at any point you will require finance, as there is no separation between you and the business, the business lacks the credibility in the market.
Partnerships are managed by two or more individuals (partners) with unlimited liability in case of any debt owned by the business. Right from the start, you will need to state initial capital each individual contributed in an official document called A deed of partnership. The deed also define how profits and losses are shared across the partners. Each partner is treated as sole trader and has to pay tax and national insurance on their individual profits by filing the personal tax return. Additionally, the partnership as a business will have to file its own tax return, with the difference that there is no tax due, as this is dealt with already by partner’s individual tax returns. The partnership offers more potential to raise finance, as more partners can secure the debt sharing the responsibility of the business.
Limited liability partnership (LLP)
This is a special form of partnership that exhibits elements of both partnership and corporation. There is no limit on number of partners allowed, but at least two have to be designated members, who are responsible for filing the accounts to Companies House. Additionally some or all partners may have limited liability.
The profits are still taxed as income as in case of partnership and filed on each partners’ return. LLP is required to start trading within a year of registration, otherwise it will get struck off.
Limited liability company (LTD)
Limited company is the most flexible structure and it’s recommended when you would like to separate your business activities from personal wealth. The company is separate legal entity with legal rights and obligations. It can enter into contracts, employ people, take debts and profits, and is liable to prosecutions if criminal offences are committed. The company is owned by one or multiple shareholders who appoint directors to run the business. Ownership can be divided into parts called shares, which are owned by shareholders. Owner and director can be the same person. By setting up the company, you will have less personal financial exposure and ability to work for corporate clients. Every limited company has to be registered at Companies House with name not used by anyone before. Whether the name has been taken or not can be easily checked on this website. Things to bear in mind are that there are more administrative and regulatory demands and compliance regulations for annual accounts and tax returns.
If still in doubt, please contact us and we will able help you.