The type of structure you use will depend on a number of factors unique to the business you want to start. In this article, we look at the main structures – sole trader, limited company, partnership and LLP and highlight the pros and cons of using each one.
The simplest, most ‘hassle free’ way of starting up in business is as a sole trader (otherwise known as being ‘self employed’).
You need to inform HMRC of your intentions to become self employed (or soon after you have started up), and will have to complete a self assessment tax return each year. You pay income tax and Class 2 / 4 National Insurance Contributions on any profits your business makes.
Unlike the limited company structure, sole traders do not have the luxury of limited liability in case something goes wrong – any business debts you incur, for example, will be counted as personal debts.
Two or more self employed may decide to work together and set up a partnership.
As with sole traders, partnerships do not enjoy the benefit of limited liability. The partners will share in all aspects of the business – both in terms of any profits the partnership makes, but also in terms of liabilities – which are shared.
It is very important that you sign a partnership agreement if you decide to go down this route. The partnership agreement should cover important issues such as how the business will be run, how the profits are to be split, and what happens if a dispute arises between partners.
Limited Liability Company
There are over 1.1 million limited liability companies in the UK.
Unlike the sole trader structure, a limited company is a distinct legal entity from its directors and shareholders.
Shareholders are only liable for the amount of money they have invested in the shares.
Company directors have limited liability, although if you provide personal guarantees in order to secure business finance, you will have some personal liabilities.
Limited company directors have a number of legal and financial obligations to meet, including dealing with Companies House – the registrar of companies in the UK.
You will be liable to pay Corporation Tax on any profits the company makes, and complete an annual self assessment return for the income you personally draw down from your company.
A limited company may provide a more professional image for your business, and in some cases (such as IT contracting or Interim Management), you may not be able to operate as a sole trader.
The costs of incorporation are not high; you can set up a limited company for under £50 these days but operating as a limited company is a little more expensive than being a sole trader (mainly due to higher accounting fees).
Limited Liability Partnership (LLP)
A limited liability partnership shares some elements of both the limited company, and the partnership model.
The LLP is a distinct legal entity, like a limited company, and is governed by Companies House.
In order to form an LLP, there must be a minimum of two members, which can be individuals or businesses.
You should draw up a Deed of Partnership to outline how the LLP is to be run, and detail the roles and responsibilities of its members.
The LLP model is relatively flexible, and members are taxed directly, via the self assessment route.
Many accountancy and legal firms use the LLP structure, although it is not widely used by small businesses or start-ups.
Further information and resources on business structures
Unsurprisingly, there are no strict rules to determine which business structure you should choose for your start-up. We would highly recommend you discuss your options and get professional advice from an accountant before deciding which business structure to use for your enterprise.
For more help on the various aspects of forming a company, read these other ByteStart guides;
- How to set up a limited company
- 5 things you must do when you go self employed
- Set up a limited company or stay self-employed?
- 10 advantages of running your business as a limited company over being a sole trader
- A Shareholders’ Agreement – Why you should get one if you are setting up a company with others
- The responsibilities of a company director
More on starting and running your own business
ByteStart is packed with help and tips on all aspects of starting and running a small business. Check out some of our most popular guides;
- 10 Do’s and Don’ts of writing a business plan
- How to choose the best online accounting software for your new business
- How to create business cards that make a big impression
- ByteStart’s 60-second guide to Value Added Tax (VAT) for start-ups and small businesses
- Which types of insurance must your business have?
Funding your business
- How to maximise your chances of securing a small business loan
- A Guide to ‘Alternative Finance’ – the new funding options for startups and small businesses
- Finding finance for your new business – funding advice for start-ups
- 10 Top tips to ensure your crowdfunding efforts are rewarded
- What to do when the bank says “NO”!
Money & Tax matters
- 10 ways small business owners can pay less tax
- Sole trader tax – a guide for start-ups and the newly self employed
- Dividend tax changes from April 2016 – A summary of the financial effects for small business owners
- ByteStart’s Guide to the main business taxes
- Corporation Tax – How to reduce your bill
Promoting your business
- Making your small business a BIG hit online – A Digital marketing guide for small business owners
- 7 Brilliant branding tips for start-ups
- The “Magic 10” Tips on networking – how the experts build great networks
- How to attract customers from heaven – not clients from hell!
- 10 Top tips for small businesses starting out with social media
- Employers liability insurance – do you need to get cover?
- Becoming an employer – Your responsibilities when you hire staff
- Health & Safety compliance for small businesses – where do you start?
- A Guide to the National Living Wage for small business owners
- Why it’s vital you have clear ‘Terms & Conditions’ for your business