Choosing the Right Business Structure
What company business structure to choose?
One of the earliest decisions you will make when your first start your new business is how to set up your company business structure. This blog will look at the advantages and disadvantages and the ongoing filing and tax associated with the four-main startup structures.
- Sole trader.
- Formation of a partnership.
- Incorporating a limited liability company (Ltd).
- Incorporating a limited liability partnership (LLP).
The above are the four main business structures used by new start-ups. You may notice becoming a public limited company (PLC) is off the list; this is because it is rarely the case for a new business to plan to raise significant funds on the stock market within its first few years.
There are other models. These include community interest companies, cooperatives, offshore companies and franchises. However, the main focus here will be on the four most commonly chosen routes.
Sole Trader
This is a very attractive option for those who don’t have a great deal of cash or a strong likelihood of raising even bigger amounts of finance. Those who choose this route tend to be ‘lone wolfs’; such as: independent hairdressers and photographers.
The name implies you won’t be able to employ more staff. But, this is not the case. You just need to ensure you follow the rules and regulations of employing someone as a sole trader.
The Advantages:
- The are no fees or dues to register, making it a very inexpensive option.
- It is very easy and most new businesses are set up in this way.
- There is very little in the way of red tape and bureaucracy.
- The decisions you make will be instant, you don’t have to colleagues or board members while competitors steal your market advantage.
- Expenses such as business travel and some cost of your premises, even if you are working from home, are tax-deductible.
- Probably the most important advantage is that everything you make, after tax, belongs to you and you alone.
The Disadvantages:
- The business is the owner and liability is unlimited, meaning any business debt is met from the owner’s personal wealth if the business fails.
The business won’t usually continue is the event of a holiday or retirement, which can make it very difficult to take a break.
Formation of a Partnership
This is a great option for those offering services to people they know very well. The most common examples here include legal firms and building firms.
Partnerships tend to be an extension of the sole trader model, for example when two individuals work together to build the business. Furthermore, similarly to sole traders, the only requirement is that each partner of the partnership is registered with HMRC and puts in a separate tax return.
The Advantages –
- Partnerships are flexible as the business won’t collapse if one of the partners is sick or is taking a holiday.
- The business benefits from the knowledge and expertise of all partners, which allows for specialisation as one partner’s strengths can complement another’s.
- More people are contributing capital, which allows for more flexibility in running the business.
- There is less time pressure on individual partners.
- The is someone to consult with over business decisions.
The Disadvantages –
- There has to be an agreement over how profits, liabilities and ownership is shared amongst partners, which can lead to some difficulties.
- Further difficulties can arise if one partner wants to leave.
- All partners are responsible for all the debts owed by the business, so really consider the people you go into business with; the business has unlimited liability.
- Disputes can occur over the best course of action for the business.
Incorporating a Limited Liability Company (Ltd)
Incorporating a business means registering a limited company at Companies House and results in the business having its own legal identity that can own assets in its own right. The private limited business structure is often used by small businesses, such as an independent retailer in a market town.
Before the business can start trading, it needs to be officially registered as a limited company, decide on the company officers and choose a name for the business. Once this is completed and filed with Companies House, the business can begin trading.
The Advantages –
- Most private limited companies are owned by their shareholders and are limited by shares, meaning that the face value of their share in the business is the most they can liable for.
- The great advantage of limited liability is that you can control your exposure to financial risk, this being due to the fact that a limited company is a separate legal entity to the company directors.
- The tax regime is more favourable to a registered company than to a sole trader.
The Disadvantages –
- Once the business is registered as a private limited company it is then subject to more administration and red tape.
- Once the business begins trading, it will be required to submit full statutory accounts and a company tax return to HMRC each year, as well as making monthly or quarterly payments of employees’ income tax and national insurance contributions.
Incorporating as a Limited Liability Partnership (LLP)
This type of business structure is popular in the UK and is especially suited to professional services companies. It has been adopted with enthusiasm by some of the largest accountancy and law practices in the UK.
For example, if the business you are starting is in the financial services space and you aim to grow by attracting other professionals, it could be very beneficial to consider an LLP from the onset.
The Advantages –
- The number of partners isn’t limited to just two, which means the business can benefit from a greater deal of expertise of knowledge.
- As with limited companies, the LLP model protects members’ assets and limits their liability to however much they invest in the business.
The Disadvantages –
- As with ordinary partnerships, the members’ share of profit is taxed as income and each member has to register with HMRC as self-employed, meaning it doesn’t give the same tax advantages that a limited company gives.
- Problems can arise as members need to agree the share of profit each should receive.
This blog details the very basics and main benefits and drawbacks that these business structures have. But, you shouldn’t base your decision on this alone. Deciding on the best business structure for your business can be a difficult task and should be researched thoroughly.
If you need advice please contact Buxton’s for a FREE consultation.
