A lot of work goes into creating a new business. There are a lot of decisions that must be made in order to turn your business from a dream into a reality. One of the biggest decisions you will make as an entrepreneur is also one of the most basic: how will you structure your business?
In order to take some of the mystery out of this, we have set out the pros and cons of the four most common business structures. Those four structures are: becoming a sole trader; forming a partnership; incorporating a limited liability company; and incorporating a limited liability partnership.
Let’s look at how these structures all work.
Registering as a sole trader
The sole trader structure works best for people who are self-employed and do not have any employees of their own. Entrepreneurs who work alone, like photographers, independent hairdressers, or those in construction, often become sole traders.
- There are no fees to register. The process is easy and quick.
- You can write off many of your business expenses – including business trips and the cost of premises – to offset your tax burden.
- You are fully liable for any debt that your business incurs. If your business fails, your assets may be seized to cover the debt.
- You will pay an income tax on the business’s profits. Once your business earns above GBP 41,865, you will owe 40 percent in taxes.
Forming a partnership
A partnership is basically an extension of the sole trader structure. In fact, one of the most common examples of a partnership occurs when a husband and wife work together to build a business. Since two people are sharing the workload, the business won’t fall apart if one of you comes down with the flu or goes away on vacation. However, this also means that you must be careful to pick a partner whom you can trust.
- Simple and straightforward to set up.
- Having a partner means being able to rely on someone to help with decision making and with the daily running of the business.
- Both partners are liable for any debts incurred by the business. In fact, in a partnership, you are liable for any debts your partner incurs.
- Both partners must register as self-employed and pay a tax on the business’s profits.
Registering a limited liability company (LLC)
If you choose this structure, you will need to register a company name, learn more here on registering your company name, and file a series of documents with Companies House. Registering as an LLC gives you a certain status that sets you apart from a start-up. But the real advantage to limited liability is that it protects you in the case of your business going under.
- Because an LLC is a legal entity, the company pays a corporation tax. You, the director, are taxed only on your salary, not on the business’s profits.
- There is a firewall between you and the company. You are not liable if the business goes under.
- The paperwork is fairly onerous. You will need to submit statutory accounts and a company tax return to HMRC
- You’ll need to pay income tax and NIC’s for your employees.
Registering your business as a limited liability partnership (LLP)
In order to become an LLP, you need to have at least two “designated members” who share the responsibility of filing annual accounts. But an LLP can have an unlimited number of members.
- An LLP protects your home and other assets, just as an LLC does.
- You share the responsibility for the business with your partner, or partners.
- LLPs are taxed in the same way that traditional partnerships are. Each partner must register as self-employed and pay an income tax on the business profits.
Whichever structure you decide on, starting a business is an exciting venture. We hope this article helped in your decision making and we wish you the best in your new enterprise!