Do you know what the types of business structure are and how to pick the right one for you?
Every business has a structure. More often than not, it was chosen before the business started without the business owner understanding their options. It's also not something that a business owner reviews very often.
Read below to find out more about the types of structure and why they are important.
Sole Trader
This is what most people refer to as "Self-Employed", but you do not have to work alone, you can employ people under this structure.
As a Sole Trader, "you" are the business, there is no separation from a legal or tax perspective.
You are liable to income tax and National Insurance on the business profits through Self Assessment.
It is most common amongst small businesses.
Advantages
There is minimal red tape and reporting obligations.
You have full control of the business decisions.
You keep all the profits.
It is a very simple structure.
Disadvantages
Personal liability - as there is no legal separation between you and your business, you are personally liable if things go wrong.
You are taxed on all the business profits, there is little flexibility for tax planning.
Partnership
Similar to a sole trade, but there are at least 2 “partners”. No maximum number of partners.
Partnership agreement required to govern how profits and liabilities are split between the partners and other areas such as joining/leaving partners etc.
Each partner is liable to income tax and National Insurance on their share of the partnership profits
Partnership should be registered with with HMRC and must file a tax return each year.
Advantages
Ability to share the pressures of running the business with the with other partners.
Disadvantages:
Each partner is jointly and severally liable for business debts (if one person is sued, the others share the damages).
Limited Liability partnership
This is a hybrid between partnership and limited company.
Required to register with Companies House and has similar filing obligations to a limited company.
It does benefit from limited liability protection – similar to the corporate veil of a limited company.
Common amongst professional service firms such as accountants and lawyers.
Must file a tax return to HMRC each year, similar to a partnership.
Advantages
Each partner declares their share of profits on their own tax return.
If the partnership fails, each partner is only liable for the face value of their share.
Disadvantages:
Significant admin burden when compared to ordinary partnership.
Limited company
Separate legal identity to you.
Filing obligations with Companies House as well as HMRC.
The company is run by the “Directors”.
The company is owned by “Shareholders”, which can be the same as the directors.
It is taxed on profits through Corporation Tax.
Advantages
Legal separation creates “corporate veil” less personal risk for you as the owner (veil can be lifted – fraud etc).
Company pays Corporation Tax on it’s profits which is can be lower than personal tax rates but the gap is regularly changing with changes in tax rates.
Disadvantages:
Significant filing obligations with Companies House and HMRC.
Shareholders will pay tax on money taken out the business. Which can be a problem if they want to withdraw all the money as they can end up paying more tax than as a sole trader.
What should I do?
If you want to know more about the types of structure or want to discuss your options for changing structure, please get in touch with our experts who will be happy to help assess your individual situation and provide advice accordingly.
The above lists are not exhaustive, but cover some of the key point f or each structure.
FAQ's
Q. Can I change my mind once I’ve chosen a structure?
A. Yes, although there are tax and legal points to consider before changing. Speak to a professional first
Q. What structure should I chose?
A. Ultimately, it doesn’t matter too much when starting out. What matters is starting the business and getting momentum. We always recommend the best way to get it right is to start by setting up for the business you want to be running in 3 years time, not what suits you right now.