How to choose the right structure for your start-up business

Whether you’re dreaming of being the next Richard Branson or are simply fed up of having to dance to someone else’s tune, it’s a big decision to start your own business. No doubt, you’ve considered it carefully, weighing up your entrepreneurial enthusiasm versus the lack of financial security in the early days and deciding, on balance, that going solo is the right thing to do.

Setting up a new business is a busy time that can be both exciting and exhausting. Among the many decisions you’re having to take very early on is what kind of business you are going to be trading as. Regardless of whether you’re a self employed electrician, an independent financial consultant or an ecommerce business director, what your accountant and HMRC will want to know is which legal business structure you’ll be operating from.

If you’re struggling to make an informed decision at this point, it’s well worth taking professional advice from someone in the know. At OS Accounting Ltd, for instance, you’ll spend time with one of the partners to help you scope out your business objectives, discuss your best options in terms of day-to-day financial management, taxation and compliance issues, and choose the most favourable legal structure.

Briefly, there are four different business structures in the UK:

  1. Sole trader

A sole trader is the simplest business structure. As far as the law is concerned, there is no separation between you and the business – you ARE the business. As a self employed person, you are fully liable for your business, meaning you are entitled to receive and income and responsible for any debts you owe. If you cannot pay your debts or you go out of business, your personal assets may be at risk.

You must register with HMRC as a sole trader by 5th October after the end of the tax year. Your business profits are taxed as income and must be declared on your annual Self Assessment Tax Return. Unlike with other types of business structure, there is no need to publish annual accounts or produce any other documentation other than that required for tax purposes (including VAT if applicable). You also have to pay National Insurance Contributions.

  1. Partnership

A partnership is similar to a sole trader structure, except that there is more than one individual running the business. It’s essentially several sole traders working together as partners; all are self employed and taxed as such. There is no legal difference between the partners and the business.

As with sole traders, there is unlimited liability, meaning all partners are jointly and severally liable for business debts. Should one partner decide to make off with the money, the other partners’ personal assets may be at risk. That’s why it’s highly advisable to draw up a partnership agreement which specified the percentage of the business and its profits/liabilities owned by each partner.

A partnership must be registered with HMRC, with one partner nominated as the partner responsible for filing tax returns. Annual tax returns must be completed by the partnership and each of the partners individually. Like with sole trader businesses, there is no requirement to file public accounts.

  1. Limited Liability Partnership (LLP)

Limited liability sets this structure apart from a regular partnership, creating a separate legal entity for the business. A LLP can enter into contracts under its own name. This offers protection for the partners’ personal assets if the business is sued.

LLP is the preferred business structure for many professional services firms including solicitors, accountants and architects. It’s a hybrid structures that combines the benefits of a partnership (including the favourable tax treatment) with the added protection offered by limited liability status. LLPs must be registered with HMRC and incorporated at Companies House, submitting annual accounts. Each partner must also file individual tax returns.

  1. Limited company

Forming a limited company means a separate legal entity is created from the individual directors who run the business and the shareholders who own it. Typically, the director(s) will own all the shares in a small company and it is their responsibility to run the company in compliance with all relevant legal obligations. A director shareholder can draw a salary and receive net dividends after corporation tax. In terms of taxation, limited companies have a lot more flexibility than sole traders or partnerships.

A limited company must be incorporated and registered at Companies House, and there are standard legal documents that state what the business is and what it can do. The burden of compliance including annual filing of public accounts, corporation tax returns and confirming company directors and shareholders, puts many start-ups off going down this route.

However, with the guidance and advice of an experienced accountant, running a fledgling business through a limited company can often result in smaller tax and NI bills than under sole trader or partnership arrangements, which can make this structure and excellent business decision.