So, you’ve decided to start your own business and you’re ready to take the first steps, but being an expert in your field doesn’t mean you have been magically gifted with the general business knowledge you need to administrate the details. Amidst all the excitement, have you given much thought to how the choices you make now will affect your future plans?
One of the first decisions you have to make is about company structure. Selecting the right structure for your business is critical, since your choice can impact how much tax you pay, how much paperwork you need to file, and how you can distribute your profits.
Generally speaking, there are four main start-up structures to choose from; you can become a sole trader, form a partnership, or incorporate as a limited liability company (LTD) or partnership (LLP). There are a number of other options, including cooperatives, franchises, PLCs etc, however these are more complex and less common for start ups. If your business plan changes in the future, you can shift into another structure to accommodate your needs.
Here is a simple guide outlining the pros and cons of these four main structures to help you decide which is best for you business.
1.) Sole Trader
Pros:
- Inexpensive— there are no registration fees
- Easy to set up
- Flexible
- Virtually no barrier to entry
- You maintain control
Cons:
Unlimited liability: There is no separation between you and your business. In the event the business fails or is sued, any debt or liabilities can be met with personal wealth. It can be a precarious place to be: your assets, home and family are exposed.
Profits taxed as income- initially this could be a benefit, however as your business grows and you hit a certain threshold, your profits will be taxed at very high rate: 40% at £41,865 and 45% above £150,000.
2.) Forming a partnership
Pros:
- Low Cost
- Easy to set up
- Flexible
- Additional support (the business won’t suffer if you’re ill or want to go on holiday)
Cons:
Unlimited liability: There should be an agreement as to how the liabilities, ownership and profits are split and what would happen in the event that one partner wishes to leave. Typically, all partners are responsible for all the debts owed by the business.
3.) Incorporating a Limited Liability Company (Ltd)
Which means registering a limited company (or LLP) at Companies House and creating a separate and independent legal entity.
Pros:
- Increased credibility for the business
- Makes it easier to borrow money
- Control your exposure to financial risk
- Less personal financial exposure
- Favourable tax regime
- Ability to work for corporate clients
Cons:
- Greater administrative burden
- Heavier regulatory demands
- Annual accounts and financial reports must be placed in public domain
4.) Incorporating a Limited Liability Partnership (LLP)
LLPs are essentially a combination between a traditional partnership and a limited liability company (the number of partners is not limited.)
Pros
- Flexibility: can be incorporated in members’ agreement
- Increased credibility for the business
- Makes it easier to borrow money
- Control your exposure to financial risk
- Less personal financial exposure
- Favourable tax regime
- Ability to work for corporate clients
- Flexible
- Additional support (the business won’t suffer if you’re ill or want to go on holiday)
Cons:
- Profit taxed as income
- Partners must disclose income
- LLP must start to trade within a year of registration or be struck off.
