The Best Structure for Start Ups?
Are you a start-up or young business? Are you wondering which is the best business structure for start-ups?
There are four primary options for a business structure in the UK. It’s essential that you consider which is best for you BEFORE you start trading. Each has its own set of advantages and disadvantages. Let’s look at the key differences –
WHAT ARE THE OPTIONS?
1. Sole Trader
3. Limited Company
4. Limited Liability Partnership (LLP)
This is how a lot of businesses start out. A sole trading business is an extension of an individual. So, it’s a common structure for people trading on their own. Think of hairdressers and therapists and some trades.
The benefits of trading as a Sole Trader are the flexibility it offers. You can do what you choose to, without the restrictions of the other structures. You are self-employed.
There is a risk attached though! If something goes wrong you are liable. So any assets owned by the individual are at risk. This can include your home, car and any personal savings.
One of the key steps to take if you are going to trade as a Sole Trader is to have a separate business bank account. Everything relating to the business should go through here. Keep the business records separate from your personal ones.
It’s a good idea to make sure you record any income at all, whether business related or personal. Keep your personal income separate from your business income. Research your accounting software options to make life easier here
The individual needs to notify HMRC that they have started to trade. You will need to submit a Self-Assessment Tax Return by 31st January each year.
Partnership is like a Sole Trader, other than there being more than one person involved.
Each Partner has the right to enter into contracts on behalf of the Partnership. Each Partner is also liable for any losses made by the Partnership. Again, there is no limit to the liability of the Partners should something go wrong. Each is liable for the full amount of any debts.
Get advice on setting up a Partnership Agreement before you start to trade. To ensure it is watertight this should be drawn up by a Solicitor. This will protect each partner in the event of any future dispute.
The individual handles payment of tax on their part of profits. Each partners declares their profit on their personal Self-Assessment Tax Returns. You then pay your own income tax.
Partnership accounts can be tricky and you should take advice about setting them up.
A Limited Company is quite separate from the owners of the business. It will live on after the deaths of its Directors. It is thus essential that you have a Shareholders Agreement in place. This will decide what happens in this or any other event. As before, we would recommend that you use a Solicitor.
A Limited Company confers limited liability on its Directors. So their personal assets are protected in the event that the Company fails. This is one of the reasons why Limited Companies are so popular.
The Directors have responsibilities to the Company. As a Director you must put this before your own interests. You must also answer to Shareholders, who may not be the Directors.
A business that is a Limited Company is often perceived to be more established. Your business may considered more credible than a Sole Trader. It is more visible through the records that are available at Companies House. These are on public record and accessible online.
A Limited Company requires more detailed records. It is more expensive to run, as costs, including accountancy, are higher. Your Memorandum and Articles of Association will state how your company can act. It is also governed by the Companies Act. A Company must also communicate that it IS a Limited Company. Whenever it corresponds with another party, including website and emails.
You must make regular submissions to Companies House and HMRC. There will be fines and penalties for missing these.
The Company makes its own submissions to HMRC, in the form of a Corporation Tax Return and pays Corporation Tax.
Limited Liability Partnership
As with a Limited Company, an LLP is a separate legal entity in its own right. Rather than Directors, an LLP has Members, who both own and manage the business.
As with a Partnership the profits are shared between the Members.
An LLP is also registered with Companies House and operated in a very similar way to a Limited Company.
HOW DO I DECIDE WHICH STRUCTURE TO CHOOSE?
You should base your decision around:
The most suitable finance structure.
Your preferred level of administration.
Whether you need the increased credibility of being a Limited Company.
Whether you’re happy with the business records being on public record.
What are your long-term plans for the business?
Taking time to talk to an Accountant will be useful in helping you set up the business in the right way for you. This will also save you problems later on.
If you are considering making any change to the legal status of your business, please be sure to talk to your accountant. Moving from a Sole Trader to a Limited Company can be straight forward. But, there are important tax considerations to doing so. To avoid large tax liabilities the timing of the change should be planned.