19 August 2015
Which Structure Should I Choose for my Small Business?
When you decide to start your own business you will need to consider the best structure for it. This structure will decide which legal responsibilities you have, including the specific paperwork needed, and the taxes you’ll have to pay.
So how do you decide which structure to choose for your new business? Here’s a brief breakdown of some of your different options to help you choose.
Sole Trader – Also Known as Self-Employed
If you work for yourself, you’re classed as a self-employed sole trader - as it’s known in legal and business terms. As a sole trader, you run your own business as an individual, not in partnership with anyone else and you are not incorporated with Companies House.
As a sole trader, you keep all the profits the business makes, after you’ve paid tax on them and after settling any outgoings you might have. You can employ staff, as being a sole trader doesn’t mean you work alone in providing your goods or services day to day. However, you are personally responsible for any losses your business makes and for the outgoings you incur.
You will have certain responsibilities, including sending a self-assessment tax return to HMRC every year, paying income tax on the profits your business makes, and paying National Insurance. You will also have to register for VAT if you expect your takings to be more than £82,000 a year.
Limited companies can still be run by you alone, or they can be managed by a team of directors. It is the company which is responsible for everything the business does, and the finances are separate from your personal finances.
Any profit made is owned by the company which can then distribute it in accordance with the company’s documentation and other legal rules.
Every limited company has members – these are the people or organisations who own shares in the company, also known as the ‘shareholders’. You can be a shareholder on your own, or there might be a group of investors who could be anyone from personal friends and family to external investors or employees. Directors can often own shares in the business but don’t have to.
There are many different legal responsibilities, duties and obligations for limited companies to adhere to and as a Director you will have personal duties which we have explained in our blog What are the Duties of a Company Director?
Most limited companies are limited by shares. This means that the shareholders’ responsibilities for the company’s financial liabilities are limited to the value of shares that they own but haven’t paid for. Often shares are paid for in full from the outset so there would be no further liability due from the shareholders. Company directors aren’t personally responsible for debts the business can’t pay if it goes wrong, as long as they haven’t broken the law or they haven’t given a personal guarantee.
To set up a limited company, no matter which type, you must register your company with Companies House and let HMRC know when you start business activities.
You will also have annual tax responsibilities, including putting together accounts, sending Companies House an annual return, and sending HMRC a company tax return. You must also register for VAT if you expect to have income over £82,000 a year.
If you enter into an un-registered partnership, you and your partner (or partners) personally share responsibility for your business.
Profits are shared between partners, and each partner will be taxed separately on their share of the profits. It follows that if you are taking a share of the profits, you will also be liable for any losses which the business may make, equally. You will also be responsible for any other relevant tax liabilities.
You are required to register your partnership’s name with HMRC for tax purposes.
You must nominate one partner to send a partnership self-assessment tax return every year. All partners must send a personal self-assessment tax return, pay income tax on their share of the partnership’s profits, and pay National Insurance.
The partnership will have to register for VAT if the takings are expected to exceed £82,000 a year.
Limited Partnership and Limited Liability Partnership (LLP)
These Partnerships are registered and one of the differences between a limited partnership and a limited liability partnership is a partner’s liability for the business debts.
In a limited partnership, liabilities for business’ debts, management powers and consequences for breaching obligations depends on the partner’s status (there can be ‘general’ or ‘limited’ partners who have different liabilities). For example, a limited partner has limited liability for partnership debts but only on conditions that include that person not having any management of the partnership. If a limited partner breaches the conditions, they will be treated as a general partner and will attract personal liability for business debts.
In a limited liability partnership (LLP), the partners are not personally liable for the business’ debts. Their liability is limited to the amount of money which they invested in the business.
No matter which partnership structure you choose, profits are shared between partners, and each partner is taxed on their share.
As with the other business structures, the partnership must send a partnership self-assessment tax return to HMRC every year. And all the partners must send self-assessment returns, pay income tax and pay National Insurance. Again if the business is expected to take more than £82,000 a year then you must register it for VAT.
You can set up an organisation that is created not to make profit but to bring people together. Such unincorporated associations are usually organisations such as voluntary groups or sports clubs and it costs nothing to set one up.
They also don’t have to be registered. Individual members are responsible for debts and contractual obligations.
If the association does start trading in any way and makes a profit, then you’ll need to pay corporate tax and file a company tax return just like a limited company.
As with any new business, you will need expert legal advice to ensure that you are adhering to the rules and regulations, and in a secure position to start your venture. Slater and Gordon have a team of lawyers that are experts in business start-ups and small businesses. Call us on freephone 0800 916 9052 or contact us online and we will call you.