At some point in your employment career, you may want to ditch your boss i.e. you have had enough of taking orders from someone else and your mind screamed ‘I want to be my own boss!’ Congratulation on taking that bold step, you are now the boss and can control your own time! But before you are on cloud-nine thinking about all the possibilities you could achieve in your new business start-up, the first and most important thing to consider is – what business structure should I go for?
In UK, the most general business structures are sole traders, limited companies and partnerships. For partnerships, there are also other types of structures such as Limited Liability Partnerships (LLPs) which I will cover in a separate article in due course.
Let’s take a closer look at each of the features, the pros and cons on the business structures.
A sole trader or partnership (if you have another business partner) are the simplest form of trading a business as there are few formalities and therefore lower costs to set up.
Assuming you are your own boss, a sole trader simply means you are running your own business as an individual. You are responsible to keep all your bills you buy for your business e.g. stocks and equipment and expenses you paid for your business.
The advantage of a sole trader is that you are able to keep all the profits in your business after you have paid tax on it, but on the downside, it is your personal responsibilities if you are making losses in your business.
You are required to send a self-assessment tax return every year (either by yourself or you could appoint us as your tax agent) and you need to pay national insurance and income tax on the profits you make from your business. You must also register for VAT (Value Added Tax) if you expect your business takings to be more than £79,000 a year.
You can also run your business by setting up a limited company. Unlike sole trader or partnership (unless a LLP), your personal finance is separated from your company’s finances. Any profits your company makes is owned by the company. After the company pays corporation tax, the company can then share its profits to the ‘shareholders’.
Every limited company has members or ‘shareholders’ who owns shares in the company. Like the word ‘limited’ suggests, most companies are ‘limited by shares’. This means the company’s liabilities is only limited by the shares that they own but have not paid for.
A Director is responsible for running the company, but not necessary own shares in the company. However generally for small business start-ups, the Director often has a majority of the shares in the company thus owns the company.
Every financial year, the company must put together a statutory account, sends Companies House an annual return, and send to HMRC a Corporation Tax Return (either by yourself or of course you could appoint us as your accountant). A company must also set up a PAYE scheme if the director or employees are paid a salary and must register for VAT if the business expects its takings to be more than £79,000 a year.
As a Director, you are also responsible to prepare a self-assessment tax return every year, pay tax and NI through the company’s PAYE scheme.
So which business structure is suitable for me?
As a new business start-up, you may want to consider trading as a sole trader or partnership as there are fewer formalities and therefore reducing your costs. However, your business is not distinguished by your personal affairs i.e. you will be liable for all the debts incurred from your business.
If you choose to set up a limited company, there are more formalities and additional statutory requirements which will increase your costs such as statutory accounts preparation, PAYE procedures, and Corporation Tax Return and Companies House annual returns. And as a director/shareholder, you are also required to file your self-assessment tax return from which your personal taxes will be based.
Despite the higher costs, the major advantage of running a limited company is that your personal liability is limited to the share capital you have put into the company. If you want to extract money out of your company, you can choose to either pay yourself a dividend as an owner, or as a salary as an employee. By taking advantage of the dividend/ salary route or a combination of both, you can minimise your overall tax and national insurance liability. Generally it may also be easier to raise finance for business capital from the high street banks through a limited company.
Choosing a business structure can be daunting at first, therefore you need to consider carefully all the features and the benefits you could reap from it. This only gives you a brief outline of the various business structures, there are also other more complex situations to consider. Please feel free to contact us if you need further advice.