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Which Business Structure Should You Use?

This helpsheet gives you an outline of the different business structures you can trade through. Your business format is not set in stone forever and you can change between them. It is fairly simple for a sole trader to take on a partner and become a partnership and for a partnership to become a Limited Company. There are however more complications with changing from a Limited Company to a sole trader or partnership.

Sole Trader
This is the simplest form of business to start where you carry on business on your own account. You are liable to income tax and Class 4 National Insurance on your profits. You can employ people including your spouse for work done.

Partnership
A partnership is two or more people carrying on business together with a view to making profit.

The partners are all joint and severally liable for partnership debts, although this does not apply to personal tax bills based on partnership profits.

It is advisable to have a partnership agreement to document the agreement between the partners. However, the partnership is often between husband and wife and there is no agreement.

Limited Company
A limited company is a separate legal entity from its members. These are the basic facts…

1. The business is owned by the limited company, not you.
   
2. You are the shareholder who owns the business and with small businesses, the director who runs it.
   
3. It must have at least one shareholder.
   
4.  It must also have at least one director and one company secretary but if there is only one person, they cannot be the same person.
   
5.  The shareholders do not have to be directors. Directors are employees of the company.
   
6. The company pays corporation tax on its profits. A small company pays corporation tax at 19%.
   
7. They are governed by company law.

Main advantages of using a Limited Company…

1. A Limited Company may appear more credible and substantial although in reality this is not necessarily the case.
   
2. The Liability of its shareholders is limited to the amount of the share capital issued and so offers protection to personal assets. In the event of company failure and not being able to pay its creditors, your personal assets are protected. However, banks, landlords and others when dealing with a Limited Company will often require personal guarantees.
   
3.  A Limited Company has better borrowing potential as it can use current assets as security by creating a floating charge over its assets.
   
4. You can use shares to enable different people to have different shares of ownership that they can pass onto the next generation.
   
5. You can have different classes of shares with different rights, such as non-voting shares for someone who wants to invest some money into the company but doesn’t wish to take part in the management.
   
6. Having a limited company can create significant tax advantages by having profits taxed at Corporation Tax rates which are a low lower than the higher rates of personal tax. It does depend on how much of your profits you leave in the company.

Main disadvantages of using a Limited Company…

1. Your annual accounts have to be filed at Companies House and are available for public inspection as is other information about the company.
   
2. Directors are personally subject to regulations and can be fined or found guilty of a criminal offence for failing to comply.
   
3. A company is more complicated to wind up.
   
4.  Generally involves higher accountancy fees as there is more for the accountant to deal with.
   
5. Taxable benefits on having your car in the company can be substantial.

The best tax structures can sometimes end up with one business being split into two distinct businesses, one running as a Limited Company and one as a sole trader/partnership to get the best of both structures. You can even have a business with a business structure such as a partnership but with one of the partners being a limited company. There is a lot that is possible once you start to put your mind to it.

Limited Liability Partnership (LLP)
LLP’s are treated like a normal partnership for tax purposes but have the protection of Limited Liability.

A LLP is a separate legal entity and can enter into contracts and deeds, sue and be sued. With normal partnerships every partner has to be party to certain documents and litigation.

Floating charges can be granted over its assets in its own name, which normal partnerships can’t do. As with Limited Companies, there is public availability of accounts.

How we can help you
We can assist in advising on the most appropriate business structure for you, giving consideration to both commercial and tax issues. It is important to get this right from the beginning.

Got a Question?
If you have any queries on any of the above, please ask a question