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Choosing a business structure

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.    Factors which may influence your decision

Legal liability

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

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.

Administration

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.

Other factors

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.

For some great advice on structuring your business, contact THP Chartered Accountants in Wanstead, Cheam, Chelmsford, Saffron Walden or London City today.

Avatar for Mark Ingle
About Mark Ingle

Owner-manager business specialist, Mark Ingle is key to building relationships with clients at the Chelmsford office. “I like to see clients enterprises grow and succeed.” Mark explains, “The team here has a lot to offer and I can see a lot of new businesses responding to that.”

Having worked for accountancy practices in London and Essex, Mark has worked with a range of companies varying in size. For Mark, THP stands out for its “local firm approach with the resources of a larger practice.”

Although a keen traveller, Mark is focused on giving his clients at THP the highest service, “Right now, I aim to help the clients we have to the best of my ability which will help me attract more of the right clients in the future.”

Mark’s specialist skills:

  • Annual and Management Accounts
  • Tax and VAT
  • Strategy and Business Planning
  • Marketing and Sales
  • Business Development
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