Date: 09/04/2018 Author: Marjorie Smith Zago
Choose the right structure for your business
Choosing your business structure is one of the most important steps you have to take and it can often be quite confusing. For this reason, we have laid out the most common models to help you make the right decision for your business. However, we recommend that you seek professional advice with an accountant to acquire further information if that is an option you can afford.
This business structure is characterised by a sole trader/self-employed who is fully responsible for the success or failure of his business. This means that the owner and the business are legally seen as one single entity and he/she is accountable to any type of liability that may take place, in other words, the business’ debts becomes the person’s debts.
This is the simplest and quickest way of starting a business. All you need to do is register as self-employed with HMRC and complete your annual self-assessment tax return once it’s time. As the owner you are responsible for paying both income tax and Class 2 or Class 4 National Insurance Contributions, all the business profits belong to you and you can deduct certain business-related expenses (travel, utility bills, broadband cost, etc.) in order to pay less tax.
A partnership can be formed when two or more self-employed individuals decide to start a business together. The partners share the profits and both are personally liable for any debts the business acquires like in the sole trade model, even if just one of them was responsible for it. It is recommended that an agreement is signed, stating how the business will be run and how profits and liabilities will be shared. The legal requirement for this type of structure is that each partner registers as self-employed and completes a separate self-assessment tax return.
In this business model, the owners are seen as legal entities separate from the company; therefore, they are legally liable for debts only to the extent of their invested capital and any given personal guarantees.They are in charge of how much personal exposure to financial risk they have, and if anything goes wrong their personal assets will stay untouched.
This type of structure is more demanding in its administration and regulations. It requires registration with Companies House and submission of statutory accounts and annual tax return to HMRC. Corporation Tax must be paid on any profits as well as quarterly or monthly payments of employee’s income tax (PAYE) and National Insurance Contributions (NICs).
In this case, unlike sole traders and partnerships, limited companies’ accounts and financial reports have a public exposure but at the same time have an increased credibility, access to certain services a sole trader might not have and the ability to work for corporate clients.
Lastly, limited companies are composed of its directors and shareholders, but it is very common for one director to be the sole shareholder of the company and in many cases its employee. In that situation, the director will have to pay income tax additional to Corporation Tax. However, he can decide how much he is going to get paid in order to pay less income tax and then have a major profit from his share return since Corporation Tax rates (19-21%) are much lower than income tax rates (20-45%).
Limited Liability Partnership (LLP)
Limited liability partnerships can be described as having a set of elements from both the limited company and partnership models. They offer limited liability to its members, but only to the extent of their investment and personal guarantees, if given when starting the business; this is further combined with the taxation structure of partnerships, offering a simplistic and flexible way of paying tax.
LLP is legally recognised as an entity separate from its forming members. In order to be incorporated, it must be registered with Companies House by a minimum of two designated individuals and trading must start within a year of registration, otherwise, it will be removed. All members share on the profits which are taxed as income, and each one is responsible for registering as self-employed with HMRC and for completing the annual self-assessment tax return.
Finally, it is important that an agreement is signed outlining how the LLP will be run, the roles and responsibilities of each member and how the profits and liabilities will be shared.