Choosing the right structure for your start-up

Once you have decided to start a business you need to decide whether you are going to launch your business as a sole trader, partnership or limited company.

Selecting the right trading structure for your business from the beginning can help to ensure you take advantage of any tax saving opportunities and/or protect yourself against some of the risks of starting a new venture.

To help you decide on what form your business should take, we have shared some of the main points you need to consider:

Sole Trader

This is the simplest form of business since it can be established straight away without any legal formalities, so for many it is often the most attractive option.

However,there is no distinction between what belongs to the business and what belongs to you, the proprietor. Therefore, personal assets can be seized if anything goes wrong. You will have complete control but all the risk.

A sole trader is taxed as an individual at income tax rates. Your tax and national insurance is calculated on the total profits you make in a tax year.

You will need to register with HMRC to complete a self-assessment tax return. There are no other filing requirements, unlike a partnership or limited company, which means that professional fees are generally lower and there is less information about your business on public record.

Many people assume a sole trader is simply a business with a single individual, but in fact you can employ staff as a sole trader.

Partnership

A partnership is similar in nature to a sole trader but because more people are involved, it is advisable to draw up a written agreement and for all partners to be aware of the terms of the partnership. 

Again, the business and personal affairs of the partners are not legally separate. The liability of each partner is therefore not capped.

As with a sole trader, each partner is taxed as an individual on their share of the profits at income tax rates and will pay national insurance contributions. The partnership will also need to file a partnership tax return but does not pay tax in its own right.

There are no filing requirements apart from the partnership and individual tax returns. However, more formal accounts may be required as part of the partnership agreement.

A further possibility is to use what is known as a Limited Liability Partnership (LLP). This is similar to a partnership and taxed in the same way. However, Limited Liability allows the partners to limit their personal risk by capping their liability at the maximum of their contribution into LLP. This comes with an additional admin burden, as an LLP is required to file accounts with Companies House, which means there are higher compliance costs.

Limited company

With a limited company the business affairs are separate from the personal affairs of the owners, but there are legal regulations to comply with. The company is run by directors and owned by shareholders. Limited liability means you have less risk but the responsibilities you have as a director are set out in law and must be followed to ensure the protection is maintained.

A company is taxed at corporation tax rates, but taxed as an individual when you take money out of the business,either through payroll or dividends. For certain individuals this may be a tax efficient structure, especially when used alongside other extraction methods such as interest and pensions. However, how you extract funds is more complex and complicated further for a company in such areas as benefits in kind, such as company cars, and loans to directors. If you are considering this structure, then you should talk to an accountant to investigate the best solutions for you.

A company has additional filing requirements with Companies House for statutory accounts and an annual statement plus is required to file a tax return with HMRC. It is likely you will also need to file an individual tax return as a director. The compliance costs for a company are therefore usually higher than other business structures.

An additional benefit of a company is that it has legal continuity. Ownership can easily be transferred meaning that you can part transfer to incentivise staff, pass onto to the next generation or sell when you retire.

A company also has a better reputation allowing you to have more credibility with suppliers, customers and funders. Some large corporates only trade with limited companies.

How we can help

To help you choose the right business entity for you the following should be considered:

• commercial risks
• expected profitability
• financing options
• how you will extract your funds

We offer a free, no obligation consultation and would be happy to discuss the next steps for your start-up. To book your initial meeting call 01522 699870 or enquire online here

Date published 26 Jun 2020 | Last updated 20 Mar 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.