Embarking on the journey with your new business will bring you excitement and challenges in equal measure – you may also see an increase in your caffeine consumption!
There will be many questions you need to consider and the most fundamental of these being the type of business structure you should choose – this decision will implicate the amount of tax you pay, your personal liability, administrative work and even your ability to raise finance – certainly not a decision to rush. As such it can feel incredibly daunting making such a major choice, especially when research on the various business structures can become confusing.
We have highlighted the four main types of business in the UK which we hope will help you on your journey:
Sole Trader
A sole trader is when you run your business by yourself. Unlike the other types of companies, a sole trader does not have any separate legal identity from the business. As the business owner, you enjoy all the profits accrued and bear all the losses and expenses that come with running the business. You are generally ‘the business’ as you control all the assets, documentation and any other needed detail. Sole traders can employ members of staff.
Partnership
A partnership is when you and your partner share all responsibility for your business. In terms of renumeration, partners share the business profits, and each partner pays tax on their share. In a standard partnership all partners are fully responsible for all debts owed by the business.
When setting up a business partnership with HMRC you need to nominate a partner who will be responsible for managing the partnership’s tax returns and record keeping.
A partnership agreement document outlines the liabilities, ownership, how profits of the business are split and what happens if one partner wants to leave. Each partner must register as self-employed and submit a separate tax return.
Limited Liability Partnership (LLP)
In this legal structure, the number of partners is not limited, but at least 2 have to be ‘designated members’ responsible for filing annual accounts.
Just as with a limited company the LLP model protects its members’ assets, limiting their liability to however much they have invested in the business and any personal guarantees they may have given when raising loans.
As in an ordinary partnership, the members’ share of profit is taxed as income – each member must register with HMRC as self-employed. LLPs must also register at Companies House and there should be a members’ agreement stating what share of the profit each member should receive.
Limited Company
A private company is incorporated and limited by shares. This means that the company has shareholders and the liability of the shareholders to creditors of the company is limited to any money they originally invested. A shareholder’s personal assets are protected in the event of company insolvency, but money invested in the company may be lost.
A company limited by guarantee must have at least one director and one guarantor. An individual may assume both positions, or there can be multiple directors and guarantors.
Company directors run the company on behalf of the shareholders. You can be both.
Limited companies must pay an application fee and be incorporated with Companies House.
If you are looking to take the leap and start a new business adventure we would love to hear from you and help make the transition as smooth and rewarding as possible.