Starting
up in business
What
Business Structure Shall I Use?
Having
made the decision to be your own boss, it is important to
decide the best legal and taxation structure for your enterprise.
The most suitable structure for you will depend on your personal
situation and your future plans. The decision you make will
have repercussions on the way you are taxed, your exposure
to creditors and other matters.
The possible options you have are as follows.
Sole Trader
This is the simplest and cheapest way of trading. There are
only a few formalities to trading this way, the most important
of which is informing the Revenue. You are required to prepare
accounts each year and they will form the basis of how you
pay your tax and national insurance. Any profits generated
in this medium 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 an extension of being a sole trader. Here,
a group of two or more people will come together, pool their
talents, clients and business contacts so that, collectively,
they can build a more successful business than they would
individually. The partners will agree to share the joint profits
in pre-determined percentages. It is advisable to draw up
a Partnership Agreement which sets the rules of how the partners
will work together. Partners are taxed in the same way as
sole traders, but only on their own share of the partnership
profits. There is no restriction on your exposure to business
creditors. Indeed, you are ‘jointly and severably’
liable for the partnership debts, so that if certain partners
are unable to pay their share of the partnership debts then
those debts can fall on the other partners.
Limited Company
A limited company is a 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 and an employee of that company. When
a company generates profits, they are the company’s property.
Should you wish to extract money from the company, you must
either pay yourself a dividend, as an owner, or a salary,
as an employee. The advantage to you is that you can have
a balance of these two to minimise 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 planning requires profits,
salary and dividends to be considered together.
There are many disadvantages as well as disadvantages to operating
through a limited company. We have a separate factsheet on
‘Incorporation’ which considers the relative merits
as well as the downsides of operating as a company,
New companies can be purchased relatively cheaply, in a ready-made
form usually referred to as ‘off the shelf’ companies.
There are additional administrative factors in running a company,
such as statutory accounts preparation, company secretarial
obligations and PAYE (Pay as You Earn) procedures. A big advantage
of owning a limited company is that your personal liability
is limited to the nominal share capital you have invested.
Limited Liability Partnership
A limited liability partnership is legally similar to a company.
It is administered like a company in all aspects except its
taxation. In this, it is treated like a partnership in all
areas of taxation. Thus 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.
One example of such an organisation is the John Lewis Partnership.
These structures need specialist advice.
How
We Can Help
We
will be happy to discuss your plans and the most appropriate
business structure with you. The most appropriate structure
will depend on a number of factors including consideration
of taxation implications, the legal entity, ownership and
liability.
Top
of page
For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
|
C o m p l e t
e 
Regulated
to carry on audit work for a range of investment business
activities by the Institute of Chartered Accountants in England
and Wales