A common question we receive is “Which is the right business structure for me?” so that’s what we’ll look at today.
In honesty there’s no right or wrong, it’s more of a case of what’s going to work best for you and your business! The most used structures here in the UK are Sole Trader, Partnership, Limited Liability Partnership (LLP) and Incorporating a Limited Liability Company (Ltd).
Sole Trader:
As the title suggests a Sole Trader is solely responsible for running their business including any legal requirements that come with it. You’d be considered as self-employed and must register with HMRC as soon as you start trading. As a sole trader you keep profits after tax (National Insurance and Income Tax is also payable subject to profit thresholds) but are also solely responsible for any business debts. Being a Sole Trader doesn’t mean everything has to be done on your own though, you are able to employ staff if you need to. So basically, one owner who can keep all after tax profits but is responsible for all debt.
Partnership:
Again, you don’t have to be a rocket scientist to realise that with a Partnership there’s more than one ‘person’ that is legally responsible, all partners share the profits, and each partner pays their own tax on their share. Each of you would be registered as self-employed with HMRC and each must complete a tax-return. A partner doesn’t have to be a person, you could be in a partnership with a Ltd company.
So, once you have a name for your business partnership between yourselves decide who would be the ‘nominated partner’ this ‘person’ would be responsible for managing the partnership’s tax returns and record keeping.
An agreement would need to be set up to outline ownership, liabilities, how profits are split and what would happen if a partner left the business. In general, all partners are responsible for any debts owed by the business.
Limited Liability Partnership (LLP):
In an LLP the number of partners isn’t limited, but at least 2 of you would have to be ‘designated members’ meaning 2 partners would be responsible for filing annual accounts. Like in a partnership each member would be registered as self-employed and their profit is subject to tax. With an LLP, the member’s assets are protected, limiting liability to how much they have invested into the business and any personal guarantees they may have provided when applying for loans etc. An LLP must also be registered with Companies House and you should have a members’ agreement in place to confirm what share of profits each member should receive.
Private Limited Company (Ltd):
So, this is a private company that is incorporated and limited by shares. A shareholder's personal assets are protected in the event of company insolvency, but money invested in the company may be lost.
A company limited by guarantee must have at least one director and one guarantor.
An individual can be both, or there can be multiple directors and guarantors.
Company directors run the business on behalf of shareholders, again an individual can be both.
Limited companies must pay an application fee and be incorporated with Companies House.
To complete this you need;
The company’s name and registered address, at least one director, at least one shareholder, details of the company’s shares and rules about how the company is run - known as ‘articles of association’. The company must pay corporation tax out of any profits and can then distribute the remaining profits among shareholders.
It’s run by the directors who owe legal duties to the company and its shareholders.
Still a bit confused about choosing the right business structure?
At Ultra Tax Ltd we may be able to help, why not get in touch for personal recommendations based on you/your business’ circumstances and objectives. We can advise which would be the most tax-efficient route for you, at the end of the day who wants to pay more than they have to?
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