Different types of business structures and choosing the best one for you!

Choosing a business structure is one of the most important decisions you need to make when setting up a business. The structure you choose will have significant implications on the amount of tax you pay, the level of personal liability (if the business fails) and the amount of administrative work that is required.

These are the main types of businesses structures in the UK, each will have different tax and liability implications for owners and shareholders:

• Sole Trader
• Partnership
• Limited Liability Partnership
• Limited Company

Sole Trader

The sole trader is the simplest structure, this is where a person works for themselves as an unincorporated business. Sole trader business are not separate entities from their owners, therefore will be responsible for all liabilities and this includes personal assets.

As a sole trader you are required to register with HMRC as a self-employed individual and pay income tax and National Insurance on profits you have made. This is reported annually via a Self Assessment tax return. You are then entitled to keep all the profits the business has made (Unless you decide to hire part or full-time staff to help you run your daily operations).

Starting up a sole trader is generally the simplest but when you scale up and the business is making larger profits it can become less tax efficient.

Partnership

The structure of a partnership is very similar to a sole trader, it basically involves two or more individuals that agree to share in the profits or losses of the business. Partners of the business share the risks, costs, benefits and day to day running of the organisation. Like a sole trader, partners are personally responsible for losses or liabilities the business intakes.

To avoid problems between the partners it is advisable to put together an agreement which details, how profits will be split, how costs will be split and any other important business arrangement.

Each year the partnership is required to fill out its own tax return detailing the income and profits the business has made. Each partner will pay tax on their share of the profit. The partners will report their share of the profits on their personal tax returns (Self Assessment).

Limited Liability Partnership (LLP)

An LLP is a similar structure to a Partnership however an LLP is a separate business entity from the partners. This offers protection to the partners as they are not personally liable for the business’ liabilities.

The LLP must be registered at Companies House and with HMRC. Furthermore, Annual accounts will have to be prepared and filed.

Responsibilities and share of profits are set out in an LLP agreement. Similar to a Partnership, members will pay taxes on their share of the profits and this will be reported via their Self assessment tax returns.

Limited Company (LTD)

Limited Company is a popular business structure, an LTD is a separate business entity from yourself. The company is responsible for all its liabilities and owns the profits that have been made through trade. Companies are owned by their shareholders and run by the directors.

Paying yourself is different from the structures mentioned above, you will be able to pay yourself a salary if you are on the company Payroll. Then the profits (profits after Corporation tax) the business has generated can be distributed to the shareholders in the form of dividends. Dividends received from a company will be taxed personally (dividends are taxed at a different rate which will be detailed on the Gov website).

To set up a Sole trader or Partnership is a simple process as they don’t require the formation of a separate entity (Note they still need to be registered with HMRC). The process of forming a LLP or LTD company can be complex, you will firstly need to register the company at Companies House and draft the company’s Memorandum and Articles of Association.

A LTD company has the following reporting requirements:

• Annual Company Accounts with Companies House
• An annual Confirmation Statement with Companies House
• HMRC Corporation Tax Return

Additional, changes to things like Registered office, Directors or Shareholders need to be reported separately.

What business structure should I choose?

Choosing the right business structure can help you save tax and starting with the wrong one can result in complications in the future. If you would like to discuss choosing the best business structure, please book in a Discovery Call with one of Business Managers.