When you set up a new business, there is a lot to think about, including getting the right company structure. Giving this careful thought from the start allows you to build on the best foundations and grow in the way that you want to. This involves choosing whether to be a sole trader, creating a limited company, entering into a partnership or even becoming an LLP.
Here, we look at all of the options to help choose the right one for your business.
When starting your own business, you are often doing it by yourself, and so becoming a sole trader seems to be the most logical option. This is best suited to those who offer what is considered to be freelance work such as photography, hairdressing or writing, for example and is easy to do as there are no fees to register as such.
Choosing to base your business around being a sole trader does not mean that you can’t employ staff, but there are certain rules that you will need to abide by if you do.
One of the main things that people love about being a sole trader is having the ability to make decisions instantly and to keep everything you make once tax has been deducted. However, this does mean that there is no-one to bounce ideas off, and all failures and mistakes are yours, as well as the successes.
If you offer services with someone else, then a partnership can be the best route to go down. This is often found in building and domestic services and is seen as an extension of the sole trader company structure as it offers similar flexibility.
It does mean that the business can continue if one of you is unwell or on holiday, but will need an agreement on how liabilities, ownership and profit will be divided. You should also plan for what will happen if one of you decides to leave the partnership.
All partners are responsible for the debts incurred, and the partnership is considered to be unlimited. You will be required to pay Class 2 National Insurance contributions when your profits reach £5,885.
Turning your business into a limited company requires registration through Companies House and can make your business seem more credible. It allows you to borrow money against the business and allows you protect your personal assets. There is a lot more administration involved in running a limited company, and there are shares involved which can be held by a single person or others.
Limited companies pay corporation tax on their profits and directors are taxed as employees. You will be required to submit full statutory accounts and tax returns to HMRC annually.
Limited Liability Partnerships
A Limited Liability Partnership (LLP) is best suited to professional services and bridge the gap between partnerships and limited companies. They provide the tax regime and flexibility of a partnership and the limited liability of a limited company to offer the best of both worlds.
Whichever structure you choose, it is best to investigate all possibilities and work out which one will suit the way you want to work and grow. By deciding this from the start, you can understand the implications and work within them to make the very best of your business.
Stephen Allcock is a Chartered Accountant and the firm’s Senior Partner and has been a partner of Rogers Spencer since 1980. Stephen specialises in Accountancy Solutions, Audits, Bookkeeping and Tax and VAT. Find out more about Stephen here.