Choosing the Most Suitable Business Structure: There are different types of business structures if you want to start a business. You can operate as a sole trader, partnership, limited liability company (Ltd) or limited liability partnership (LLP). Other business structures include co-operatives, franchises, offshore companies and Community Interest Companies. This article will discuss the advantages and disadvantages of the common types of business structures and help you understand how each structure affects the growth of your business. It will also focus on registration or incorporation and taxes.

There is no need to start a public limited company (PLC) unless you want to join the stock market after some time. Your first option should be a sole trader or partnership.

The Common Types of Businesses

  • Sole Trader – This type of business if formed by one person who is legally responsible for every aspect of the business, enjoys the profits and is liable for losses.
  • Partnership – A partnership is formed by at least two people who share profits and are all responsible for the company’s management activities.
  • Limited Company – This is a private company owned by people who are responsible for all debts. The owners’ liability is limited to the original amount invested (capital).
  • Limited Liability Partnership (LLP) – In this type of business, business partners (some or all) have limited liability. The business combines the characteristics of corporations and partnerships.

Advantages and Disadvantages of Each Business Structure

Business Structure Advantages Disadvantages
Sole Trader ·         Low start-up costs (no registration costs)

·         You are the boss

·         Minimal financial reporting

·         Minimal paperwork because tax returns are filed annually

·         Unlimited liability for all debts (personal assets are exposed and can be used to meet debts)

·         More tax paid (the HMRC taxes profit as income)

·         Lack of credibility

Partnership ·         Easy to raise capital

·         Minimal financial reporting

·         Easy to start operations

·         There are more heads

·         All partners have unlimited liability for debts

·         More tax paid

·         Little credibility

·         Can be difficult to dissolve

Limited Company ·         Limited financial exposure (family and assets protected)

·         The tax rate is favourable

·         Opportunity to work with corporate clients

 

·         Too many regulations and administrative demands (such as being the director and secretary at the same time)

·         The public needs to see the company’s financial reports and accounts

LLP ·         Flexible and easy to incorporate based on an agreement

·         LPPs have the same benefits as partnerships and limited companies

·         Easy to borrow funds

·         The HMRC taxes profit as income

·         All partners disclose income

·         Partners have one year to start operations after registration

 

Forming, Registering/Incorporating Your Business

If you want to operate as a sole trader, there is no registration fee. You can start as long as you have the capital and business cards. It is also possible to hire staff, but you must follow the relevant rules.

Forming a partnership involves working with people you can trust such as your wife or husband. The partners must agree on how to share profits and liabilities, as well as what happens in case one partner decides to leave.

Companies House will help you register a limited company (Ltd or LLP). You must register a company name and choose a location for your business. Moreover, members of LPPSs must agree on how to share profits.

Taxes

If you are operating as a sole trader, you should register with HMRC for self-assessment. An income between £41,865 and £150,000 is taxed at 40% while an income above £150,000 is taxed at 45%.

In a partnership, each partner is taxed as a self-employed individual. This means each partner must register as self-employed. If you make more than £5,885 (profits), your tax per week is £2.75 (Class 2 NIC). If you make more than £5,885 (up to £41,865), you will be taxed at 9%.

A limited company pays corporation tax and the tax is deducted from profits. The directors pay tax as other employees. The corporation tax rate is 20% if the company makes £300,000 (or less) and 21% if the company makes more than this amount. Also, members pay tax (PAYE) on their salaries. The HMRC requires LPP members to register as self-employed.

Visit the 1st formations website to find out more on registering your business.

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