Starting a business is exciting.
But before you dive in, there’s one critical decision you need to make… how to structure your company.
It might not seem like the most thrilling part of launching your venture, but getting this right from the start can save you significant headaches down the line. Your business structure affects everything from how much tax you’ll pay to how protected your personal assets are if things go wrong.
The good news? You have options. The key is understanding which structure best fits your circumstances, ambitions and appetite for risk, and that’s what this blog is about.
Why your business structure matters
The way you choose to structure your start-up business will affect your tax, liability, administrative obligations and growth potential. While it’s always possible to change structures down the line, doing so can be costly and complex, so it’s always better to get it right the first time. Seeking professional advice early on can save you a lot of time and money later on. In the UK, you have a number of options for structuring your business. These are:
Sole trader
Being a sole trader is the simplest structure to set up. Because you and your business are legally the same thing, all money in the business is legally yours. You get complete control over decisions in the business, and the admin required is minimal. Registration with HMRC is quick and simple. You file a tax return each year, declaring your income and expenses, and pay your tax bill accordingly.
The downside is that you’re personally responsible and liable for any debts in the business, as there’s no separation between you and your business. All your profits are taxed as personal income, which may not be tax-efficient as your business grows. It can also be harder to raise finance through grants and investment, as your business can be viewed as ‘less serious’ than a limited company.
Partnership
A partnership gives shared ownership of a business to two or more people. It operates in much the same way as a sole trader structure.
It’s similarly simple to set up. Your profits are taxed to you, on your income as individuals. And the individuals in the business are each personally liable for any debts.
However, unlike a sole trader, decision-making and responsibility are shared between the partners. This can be beneficial when it comes to sharing the load, but disputes can arise without a formal partnership agreement in place. Each partner is responsible for the actions of the others, making transparency and trust essential.
Limited company
A limited company is a separate legal entity from its owners, known as shareholders. It’s run by a director, responsible for the day-to-day running and management of the company.
It’s possible to trade alone, as the sole shareholder and sole director of a limited company.
Because a limited company is separated from its owners, no one person is personally liable. So, as an example, the value of your house could not be used to recoup debts accrued by your business, which could occur with a sole trader.
Limited companies are also taxed differently, which can mean the profits can be managed in different ways to reduce your tax bill legally. It can also be a lot easier to bring in investment and new partners.
However, limited companies come with far more administrative obligations. Taxes are more complicated to calculate, as every member of your business, including the director, is treated as an employee. There are also costs for formation and ongoing compliance.
Limited Liability Partnership (LLP)
A limited liability partnership offers the liability protection of a limited company but with the flexibility in profit distribution of a partnership. Multiple partners can be involved in running the business.
However, the administration is far more significant than for a standard partnership. It can also be more expensive to set up and maintain, and not all business types are suited to this structure. Plus, members still need to agree on how the business is run, which can lead to disputes if roles aren’t clearly defined.
Factors to consider when choosing a structure
When choosing a business structure, it’s essential to consider how much personal risk you’re willing to take. Some structures, like sole traders and standard partnerships, mean you’re personally responsible for business debts. Limited companies and LLPs offer less liability, which helps protect your personal assets if the business runs into financial trouble.
Your choice of business structure also affects how much tax you pay and how it’s calculated. Sole traders and partnerships pay Income Tax on profits, while limited companies pay Corporation Tax, and shareholders pay tax on dividends. LLPs combine aspects of both, with profits typically taxed as personal income for members.
Different structures come with varying levels of paperwork. Sole traders and partnerships have minimal filing obligations, while limited companies and LLPs must submit annual accounts, tax returns and confirmation statements.
Some structures make it easier to bring in partners or investors. Limited companies are ideal for scaling or raising finance, while sole traders and partnerships can be more restrictive if you want to expand or take on additional owners.
Common mistakes to avoid
New business owners can often be tempted to take low-cost simplicity without considering the implications for liability or considering future growth plans.
Seeking professional business advice early can help you make the right choice from the start.
Buckler Spencer’s expert team is here to guide first-time entrepreneurs like you through legal structure decisions, including comparing options, forecasting any tax implications and planning for growth.
Our professional advice can help you reduce risk and set up your business on solid foundations. To learn more about how we can help you choose the proper structure for your start-up business, get in touch today to arrange an appointment with one of our team.