Setting out on your first business venture is exciting. After months of planning and conceptualising your new enterprise, you’ll likely be eager to hit the ground running.
But one question remains: which structure should I choose for my business?
Well, you have options – each with its benefits and drawbacks. We’re here to explain the three main avenues: sole trader, limited company or partnership.
If you’re unsure which may be the best fit for you, we’ll explain each one.
Why choosing your structure is important
Your business’s structure won’t just help you figure out how to run everything – it will also affect the taxes you’ll pay to HMRC.
If you become a sole trader or enter a partnership, you’ll pay income tax. For limited companies, it’ll be corporation tax. Again, these all vary, but we’ll discuss this shortly.
When running a business as a sole trader, you and the business are essentially one entity. You’ll be fully liable for running the business and keeping up with all of the legal requirements.
Every year you’ll file a self-assessment tax return, with the deadline for payment and submission falling on 31 January. As mentioned, you’ll pay income tax on your profits – with rates varying depending on your total income for the tax year.
While setting up as a sole trader is low-cost and relatively straightforward, it does come with some drawbacks.
As a sole trader, you’ll keep all of the profits after tax, but any debts the business incurs will be yours to pay. So, if something should happen to your business, your personal finances could be in jeopardy.
Overall, you’ll have complete control of your business, but you’re financially responsible for anything and everything that comes your way.
This is very different from running a limited company.
If you’re starting up a limited company, the first port of call will be registering with Companies House. This comes with a set-up cost (and will require some annual reporting each year).
Not only will you have to file statutory accounts, but you’ll have to file a corporation tax return and pay your bill every year.
Although you may have more in the way of admin compared to a sole trader, you’ll also have limited liability protection. This means that any debts or losses the company incurs won’t come straight out of your pocket. Instead, you’ll only be legally responsible for debts to the extent of your investment.
Furthermore, you’ll be able to pay yourself with a mix of salary and dividends (which HMRC taxes at a lower rate) to find a tax-efficient way of paying yourself a comfortable monthly income.
Operating as a limited company can help give the impression of greater scale and credibility, and some large organisations choose to only deal with limited companies.
Finally, you could choose to become part of a partnership.
There are two main types of partnerships – a regular partnership and a limited liability partnership.
The first requires two people to share responsibility for the business and share the profits. Each partner will pay income tax on their share.
One of the partners (which can be a person OR a limited company) will be nominated to record and file the business’s tax returns. Each individual partner, though, will have to file a separate self-assessment tax return for their income.
Much like a sole trader, each partner will have full liability for the financial aspects of their business.
A limited liability partnership works similarly to a limited company, where each partner will only have financial liability to the extent of their investment. You’ll also have to register with Companies House, so the statutory accounts will be part of your admin work.
Choosing your business’s structure is no small decision. Each choice has a myriad of benefits and drawbacks, so you need to ensure you opt for the best one for you.
We can help you weigh up the pros and cons and advise you on the most tax-efficient way to run everything.
Get in touch to talk about your business structure.