What business structure should I choose?
Choosing the best business structure may not seem like the primary consideration when you are starting out, but this decision can have a huge impact both on your personal risk and the size of your tax bills.
How you decide to operate also affects the complexity of your accounts and tax returns and many owners of SMEs aren’t even aware that the structure of their companies can be changed at a later date if the need arises.
You may, for example, choose to restructure to accommodate more growth or to take advantage of a change in the economic climate. Whatever the reasons, here are a few considerations to think about when you are choosing the optimum business structure.
1. Types of business structure
For mainstream businesses, there are four main structures to choose from: – sole trader, partnership, limited company and limited liability partnership (LLP).
Sole traders operate as individuals, with any profit or loss affecting their personal wealth.
Partnerships are similar to sole traders but with two or more people sharing the responsibilities and risks as well as the profits and losses of the business.
Private limited companies are regarded as separate legal entities in their own right and are run by directors who have certain responsibilities towards the business and its shareholders. The shareholders own the business in the proportion of their shareholdings.
Limited Liability Partnerships or LLPs have ‘members’ with limited liability who own and manage the business and share any profits.
2. What business structure – factors which may influence your decision
With some business structures such as sole traders and partnerships, the owners are personally liable for any business debts and losses. Setting up a business as a sole trader or partnership requires you to assess the risks of potential liability and decide whether you can afford those risks.
If you decide you can’t, a limited company or LLP may be the way to go. In these cases, the company’s finances are separate from any personal ones and – in the case of limited companies – the directors’ legal duties encompass managing the company with due care and diligence and avoiding conflicts of interest. Unless there is misconduct, the financial liability of the owners is limited to the value of their unpaid shares if any.
Partners of an LLP are only responsible for debts and losses that equate to the amount they initially invested, so similar to limited companies; they too enjoy an element of protection.
Taxation is a notoriously complex area for all businesses. Traditionally, it was considered that sole traders or partners paying higher rates of income tax on their profits were in a worse position than shareholders of a limited company paying much lower corporation tax rates but this is often not the case.
Limited companies are subject to corporation tax, which is paid out of any profits, with the remainder available to distribute among shareholders as dividends. Whether this is the best option to choose will depend on a number of different factors such as the level of business profits and the number of owners (or shareholders).
Talking to a Chartered Accountant or tax advisor about your own particular circumstances and objectives will help you decide which route to go down.
Running a limited company or LLP requires much more in the way of administrative work than a partnership or sole trader. Records and accounts must be filed with Companies House, meaning they are open for public inspection and there are additional costs associated with the preparation of accounts because they are generally subject to much greater scrutiny.
There are many other factors may influence your choice of business structure as well.
Give some consideration as to what kind of client or customer you are looking to work with. If most of your clients are businesses that are used to working with other limited companies, you may want to follow suit and register as one to appear more professional.
If, however, you are a plumber or electrician trading on your own with no intention of expanding beyond a personal customer base, operating as a sole trader may well be the best choice for you.
If you would like more tailored advice on structuring your business, please contact us at one of our offices in Wanstead, Sutton, Chelmsford or Saffron Walden.
About Miles Girdlestone
Miles has very broad experience ranging from corporate services, such as statutory audit, accounts and corporation tax return preparation, through to personal tax services.
Miles’ portfolio of clients is extremely diverse, encompassing individuals and partnerships in the medical profession, food processing, arable farming, printing, property rental and development, opticians and roofing, to name a few. Miles says “my commitment to my clients goes beyond numbers; I am dedicated to building long-lasting relationships based on trust, understanding, and mutual success”.
An area of particular interest to Miles is the grant audit service that he oversees. THP have earned an impressive reputation with grant bodies, such as UK Research and Innovation, with world-renowned research institutions, government bodies and private entities choosing THP to be their reporting Accountants.
Miles’ specialist skills: