When you make a decision to start a new business, the business structure that you choose affects how the business operates, including how you register your business with HMRC, the amount of tax you pay, and how and when you pay it.
Choosing the right structure
The first step is to decide on a name for your business that reflects the brand you want to become.
It is important that you make sure that you choose an original name so you don’t end up in any legal trouble, or, if you are planning to set up as a Limited Company, the name that you register with HMRC must be one that is not already in use.
Once you have decided on a name for your business, the next step is determining your business structure – or legal structure as its often referred to.
The decision you make on your business structure will have repercussions on the way you are taxed, your exposure to creditors, and other matters.
We have included a brief summary of the possible business structure options you have below, however, if you require more detailed information then please do not hesitate to get in touch and book a consultation with one of our Directors.
Sole trader
This is the simplest way of trading. Being a sole trader is also known as being self-employed.
There are only a few formalities to trading this way, the most important of which is informing HMRC. You are required to keep business records in order to calculate profits each year and they will form the basis of how you pay your tax and national insurance.
Any profits generated in this medium are automatically yours. The business of a sole trader is not distinguished from the proprietor’s personal affairs so if there are any debts, you are legally liable to pay those debts down to your last worldly possession.
Partnership
A partnership is an extension of being a sole trader. Here, a group of two or more people will come together, pool their talents, clients, and business contacts so that, collectively, they can build a more successful business than they would individually.
The partners will agree to share the joint profits in pre-determined percentages. It is advisable to draw up a Partnership Agreement that sets the rules for how the partners will work together.
Partners are taxed in the same way as sole traders, but only on their own share of the partnership profits.
As with sole traders, the partners are legally liable to pay the debts of the business. Each partner is ‘jointly and severally’ liable for the partnership debts, so if certain partners are unable to pay their share of the partnership debts, then those debts can fall on the other partners.
Limited Company
A limited company is a separate legal entity from its owners. It can trade, own assets, and incur liabilities in its own right.
Your ownership of the company is recognised by owning shares in that company. If you also work for the company, you are both the owner (shareholder) and an employee of that company. When a company generates profits, they are the company’s property.
Should you wish to extract money from the company, you must either pay a dividend to the shareholders, or a salary as an employee. The advantage to you is that you can have a balance of these two to minimise your overall tax and national insurance liability.
Companies themselves pay corporation tax on their profits after paying your salary, but before your dividend distribution. Effective tax planning requires profits, salary, and dividends to be considered together.
There are many advantages as well as disadvantages to operating through a limited company.
Limited liability partnership
A limited liability partnership is legally similar to a company. It is administered like a company in all aspects except its taxation. In this, it is treated like a partnership. Therefore you have the limited liability, administrative and statutory obligations of a company, but not the taxation and national insurance flexibility. They are particularly suitable for medium and large-sized partnerships.
How Blue Spire can help
We will be happy to discuss your plans and help to advise the most appropriate business structure for you. This will depend on a number of factors including consideration of taxation implications, the legal entity, ownership, and liability.
We also offer a wide range of services that are tailored to businesses that are just getting started.
| If you would like to discuss your business structure in more detail, please do not hesitate to contact us. |
