When you become a business owner, you have to be prepared to make lots of key decisions, it’s all part and parcel of running your own venture.
And if you’re just starting out, then one of the key decisions you’ll inevitably have to make is deciding which type of business structure to opt for.
Unfortunately, there’s no hard and fast rule as to which structure you should choose. For instance, if you’re a beauty therapist then you don’t automatically have to become a sole trader and if you’re an architect, then you don’t necessarily have to set yourself up as a company.
There are several different avenues you can choose to go down, here Ormerod Rutter Partner, Tony Archer, talks us through the main business structure options:
- Sole trader
Of all of the business structures to go for, sole tradership is the most straightforward route to choose. If you operate as a sole trader, then you’ll find there are very few formalities that you need to follow however, you must still make sure you inform HMRC that you’ve set up as a sole trader.
Sole traders are the exclusive owners of their businesses, which means they’re entitled to keep all of the profits after tax has been deducted, but they are liable for all losses. Furthermore, their businesses aren’t classed as being separate to their personal affairs, so if there are any debts, they’re legally liable to pay for them, which may impact them personally.
- Limited company
Unlike sole traderships, limited companies are run as a separate legal entity that doesn’t have any bearing on owners’ personal affairs.
Business owners own their limited company by holding shares in it and it’s possible for them to be both a shareholder and an employee.
Any profits that are generated belong to the company, but can be accessed by the business owner paying themselves:
- A dividend (if they’re a shareholder) or;
- A salary (if they’re an employee)
Limited companies pay Corporation Tax on their profits after paying their salary, but before they make their dividend distribution.
There are additional responsibilities associated with running this type of company, which range from preparing statutory accounts, to fulfilling company secretary obligations and following Pay As You Earn (PAYE) processes.
While partnerships might sound more complex, they’re effectively an extension of the sole trader set-up.
Typically, two or more people join forces to share the running of the business and the liabilities, as well as the profits. This is an ideal business structure for those who have a common business idea and have identified that their skills and talents complement each other.
Due to the nature of the business, the partners usually fund the business with the required start-up capital. The more partners there are the more money that can be invested into the business, which will enable greater flexibility and more potential for growth. It also means more potential profit, which will be equally shared between the partners.
As with sole traderships, the partners are liable for paying any business debts. In fact, they’re jointly liable, which means if one partner can’t pay their share, then responsibility will fall to the other partners within the company.
- Limited Liability Partnership (LLP)
An LLP is a partnership in which some, or all partners (depending on the jurisdiction), have reduced financial liability or limited liabilities.
The makeup of an LLP is very similar to a partnership company in terms of tax liability, internal management and the distribution of profits, however, unlike partnerships, one partner is not responsible or liable for another partner’s misconduct or negligence.
There is also a lesser degree of flexibility in relation to taxation and National Insurance. LLPs have enabled certain professions, that would usually operate as a traditional partnership, to benefit from the reduced financial risk of a limited company and the flexibility of a partnership.
There are plenty of different business structures for you to choose from, including the four we’ve listed above. Make sure you take the time to research the options available to you thoroughly and, if you need any further clarity or advice, don’t be afraid to ask the experts.
If you need assistance with identifying the best business structure for your company, contact our team of specialists on 01905 777600 or firstname.lastname@example.org.
Tony’s likeable personality is a big hit with clients. He specialises in property management companies and supports a wide range of businesses. He also enjoys networking with the local business community.