Setting up a new business can be a very hectic and stressful time.
It’s easy just to focus purely on your products, services, marketing and cash flow. While all of those factors are important, choosing the right structure for your business is the crucial first step.
Your business structure will set the course for your firm’s growth and tax liabilities.
There are three main choices for the structure of your business: sole trader, limited company, or limited liability partnership (LLP).
Advantages of sole trader status
If you don’t have any employees, then it makes sense to set up as a sole trader.
Unlike limited companies and LLPs, you won’t have to register with Companies House. Within 90 days of beginning work as a sole trader, you will need to notify HMRC – but this process is free and can be done online.
With no board of directors, all of the profits that you make belong to you, after tax.
Paperwork is minimal for a sole trader and business expenses can be used to reduce income tax payments, although it’s important to keep track of these records. We recommend the Xero software.
Disadvantages of sole trader status
The main disadvantage of being a sole trader is that you and the business are treated as the same legal entity.
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. Investors are likely to require an incorporated structure, if you want their cash to help you expand.
As your profits are taxed as income, you’ll be paying 40% tax on anything above £45,000 (this includes the personal allowance).
Advantages of limited companies
If you set up a limited company, your personal assets and income will immediately be separate from your business. If the company becomes insolvent, you won’t be required to bail it out.
You’ll also benefit from much more favourable tax requirements. Corporation tax is charged at 19%, compared to the income tax rate of 20% (40% above the personal allowance).
As a limited company also has shares, you’ll be able to sell these to investors to help your business grow. If you take a dividend, you won’t have to make any National Insurance contributions on it.
Disadvantages of limited companies
The main downside of the limited company is the administration involved. You’ll need to submit annual accounts to Companies House and company accounts to HMRC.
You must also register your limited company before you can begin trading. This can be an intimidating process for those not familiar with company registration.
Learn more – Advantages and disadvantages of a limited company
Limited liability partnership (LLP)
Advantages of LLPs
An LLP brings together the protection of a limited company with the concept of a partnership. An LLP is a separate legal entity where partners’ assets are protected.
The LLP structure also benefits from the flexibility available to partnerships. Partners can be appointed and removed without any money changing hands.
Disadvantages of LLPs
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. This means the 40% tax rate applies to anything above £40,000.
Income must also be declared. You only have one year to start trading after registration – otherwise you’ll be struck off the register.
Learn more – Pros and cons of being registered as LLP
How Appleby Mall can help
The best structure for your business depends on the services you offer and the flexibility you want.
Regardless of your business structure, it’s vital to set it up before your business starts operating. Steaming ahead can lead to frustrating administrative complications.
At Appleby Mall, we’re more than accountants – we’re also business advisors with decades of experience. We’ll guide you through this important decision and work closely with your business as you get off the ground.