Setting up a new business can be a very hectic and stressful time. It’s easy just to focus purely on the products, services, marketing and cash flow; however, while all of those factors are important, what comes before everything else is choosing the right structure for your business. This may seem like a backstage decision as far as your customers are concerned, but the reality is that it can affect everything in the future, from how much tax you pay, to how easy it will be to grow.
Which structure is best for your business?
When you’re looking at structures there are three main choices: being a sole trader, a limited company or a limited liability partnership.
Pros: Being a sole trader is ideal if the business is just you. This option doesn’t require any registration at Companies House and there are no fees to pay – you can get started at any time. There is no board of directors to deal with and everything you make as a sole trader belongs to you! Once income tax has been paid, of course… Paperwork is minimal for a sole trader and business expenses can be used to reduce income tax payments.
Cons: The main disadvantage of being a sole trader is that you and the business are treated as the same thing. So, if you’re sued by a customer there is no protection; if you die, the business does too. You may also find that you struggle to grow if you’re a sole trader – in particular, investors are likely to require an incorporated structure if you want their cash to help you expand. Plus, as your profits are taxed as income, you’ll be paying 40% tax on anything above £45,000 (this includes the personal allowance).
Pros: If you incorporate as a Ltd company then you immediately have the protection of separation of your income and assets and the company’s – so, if the company goes under you’re not required to bail it out. You will also benefit from much more favourable tax requirements – 19% for taxable profits – and because a limited company has shares you’ll be able to sell these to investors in return for cash to grow.
Cons: The main downside of the limited company is the administration involved. You will need to submit annual accounts to Companies House and company accounts to HMRC. You must also register before you can begin trading and that can be an intimidating process for those not familiar with it.
Limited Liability Partnership (LLP)
Pros: An LLP brings together the protection of a limited company with the concept of a partnership. So, the LLP is a separate legal entity and the partners’ assets are protected and it also benefits from the flexibility available to partnerships.
Cons: The major downside of an LLP is that it doesn’t have the same tax benefits as a limited company. Partners’ income from the LLP is taxed as personal income so the 40% rate applies to anything above £45,000. Income must also be declared and you only have a year to start trading after registration or you will be struck off.
The type of structure that works best for your business will vary, depending on what you do and the flexibility you want. Whatever you decide to opt for, it’s important to ensure this is set up before you start operating – or you could end up with some frustrating administrative complications as a result.
Deciding on the right company structure for your business can be a difficult one, so if you have any questions about what route to take, then get in touch with us here at Appleby Mall where we have experts on hand to guide you through the options available.