One you have made the decision to start your own business, it is very important to decide the best legal and taxation structure for your company. The most suitable option for you will very much depend on your personal situation and what your future plans are. The final decision you make will determine the way you are taxed, your ultimate exposure to creditors and other financial matters.

The various options you have are detailed below:

Sole Trader

This is by far, the simplest way of trading. There are only a few formalities to trading this way, the most important of which, is informing HMRC. You must keep adequate business records in order to calculate profits generated each year and these will form the basis of how you pay your tax and national insurance contributions. All profits generated are automatically yours. The business of a sole trader is not distinguished from the proprietor’s personal affairs so that if there are any debts, you are legally liable to pay those debts down to your last worldly possession.

Partnership

A partnership is simply an extension of being a sole trader. A group of two or more people come together to form the business, the aim being to collectively build a successful business with everything shared. The partners agree to share any profits using pre-defined percentages. It is highly recommended to put in place a legally binding Partnership Agreement, which lays down the rules of how the partners will work together. Taxation is paid by the partners in the same way as a sole trader, but only on their agreed share of the business profits. As with sole traders, ALL the partners are legally liable for all the debts of the business. Each partner is ‘jointly and severally’ liable for the partnership debts, so if certain partners do not pay their share, those debts can fall on the other partners. This is a very important point to consider.

Limited Company

A limited company is a totally separate legal entity from its owners. It can trade, own assets and incur liabilities in its own right. Your ownership of the company is recognised by owning shares in that company. If you also work for the company, you are both the owner (shareholder) and an employee of that company. When a Limited Business generates profits, they belong to the company. Therefore if you wish to take money out of the business, you must either declare a dividend to the shareholders, or take a salary as an “employee”. The advantage of having a limited company is that you8 can manage how you take money out of the company by balancing these two to manage your overall tax and national insurance liability. Companies themselves pay corporation tax on their profits after paying your salary but before your dividend distribution. Effective tax management requires profits, salary and dividends to be considered together.

There are advantages and disadvantages to running your business as a limited company, and before you make a decision you should consult with us, and get advice specific to your business.

We can quickly organise the formation of a limited company. There are also additional legal and administrative factors in running a company, such as statutory accounts preparation, company secretarial obligations and PAYE (Pay as You Earn) procedures if you have employees (this includes yourself if you take a salary).

However the major advantage of setting up a limited company is that your personal liability is limited to the nominal share capital you have invested, which can protect you from the company’s debts.

Limited Liability Partnership

A limited liability partnership is legally similar to a limited company. It is administered like a company in all aspects except taxation. In this respect, it is treated like a partnership. Therefore you have the limited liability, administrative and statutory obligations of a company but not the taxation and national insurance flexibility. They are particularly suitable for medium and large-sized partnerships.

Co-operative

A co-operative is a mutual organisation owned by its employees. A good example of this is the John Lewis Partnership. These company structures need specialist advice to set-up and manage..

How We Can Help

We are happy to discuss your plans beforehand and advise on the most appropriate business structure taking into consideration your future goals. The most appropriate business structure will very much depend on a range of factors including consideration of taxation implications, the legal entity, ownership and financial liability.