Choosing the right business structure is a very important decision, as it will determine the legal obligations on both you and your business. These legal obligations cover your personal responsibilities, determine how your profits will be distributed and which taxes you will need to pay.
Sole Trader
A sole trader is typically a person who owns and runs their own business. Sole traders are viewed as being self-employed, however, they can employ staff.
Any profits made by sole traders are entirely their own, however they are also personally liable for any losses and debts of the business, which may affect their personal assets. This is because the business and the individual are viewed as one entity for legal purposes. Sole traders are taxed on their income and must file a tax return with HMRC each year.
This business structure is the simplest to set up and involves minimal costs because it only requires one individual. There is no need to register the business at Companies House.
This business structure is often used as a starting point for businesses, which then move to an alternative structure as they grow.
General Partnership
A general partnership involves the sharing of responsibility for a business between two or more partners. Partners are self-employed and each partner pays tax on their share.
The partners share ‘joint and several’ liability, meaning that if one partner has incurred debt, all partners could be held accountable. It is therefore important to have a ‘Partnership Agreement’ in place which will govern the way that liability, profits and ownership are split between the partners and enable recovery from all partners if one is held liable.
There is no requirement for Partnerships to register with Companies House. However, each partner will need to register with HMRC.
Limited Liability Partnership (LLP)
A LLP is a separate legal entity, distinct from the partners that own it. There must be at least two partners. The key benefit of this business structure is that each partner’s liability is limited to the amount they have invested in the business and any personal guarantees they may have given when raising loans.
There should be a ‘LLP Agreement’ which will govern the profit split between partners, the way that the partners make decisions, the responsibilities of each partner and how they can leave or join the LLP.
Each partner’s share of profit is taxed as income and the partners must register with HMRC as being self-employed. Partners must disclose their income.
LLPs must register at Companies House.
Limited Company (Ltd)
A limited company is a separate legal entity to its owner(s). A limited company must have at least one director who is a natural person (rather than a company acting as a corporate director) but there is no limit to the number of directors the company can have. The main benefit of the limited company business structure is that it limits the liability of the owner to the amount they have invested into the company.
There are two types of limited company: a company limited by shares and a company limited by guarantee. Companies limited by guarantee are often ‘not for profit’, whereas companies limited by shares are usually profit-making businesses. The latter is the more popular business structure.
The profits made by the business are owned by the company, rather than its directors or shareholders, and can be distributed by way of dividend.
Corporation Tax must be paid by the company on the profit made each year. Directors will need to pay tax and NIC through the PAYE system if they are paid an annual salary, as well as completing a self-assessment tax return.
The company must be registered at Companies House and must file annual accounts.
For more information and to find out how we can help you, please contact our Corporate and Commercial Team on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.