Choosing a Company Structure
When starting out in business, it’s important to legally register your business with a company structure.
If you feel unsure then this is something that your accountant is likely to be qualified to discuss with you. Choosing the right type of company structure can bring protection and tax benefits.
There are 4 main types of company structure: Sole trader and Partnership, which do not need to be registered. Limited liability partnership (LLP) or private limited company can be incorporated at companies house, online. There are other company structures but these are the most commonly chosen routes.
This is the smallest and simplest type of company structure, typically adopted by ‘one-man-bands’. A market stall trader or hairdresser might choose this type of company structure as it is quick and easy to set up, has little in the way of ‘red tape’ and is inexpensive. The down-side of this company structure is that there is little distinction between the individual and the business. You personally become liable for the debts of the business should it fall on hard times. Also, as soon as you reach circa £40,000 in profit you will begin to pay 40% tax. Sole traders are also expected to register for self-assessment tax returns and will need to file a tax return each year and pay fixed rate class 2 NIC + class 4 NIC on any profit. Contrary to the name, sole traders can employ staff; sole trader means that you are responsible for the business, not that you work alone. Sole traders that have a turnover in excess of £82,000 per year must also register for VAT.
When starting out in business, it’s important to legally register your business with a company structure. If you feel unsure then this is something that your accountant is likely to be qualified to discuss with you. Choosing the right type of company structure can bring protection and tax benefits.
Where two or more people come together to run a business, a partnership may be formed to bring those parties into a legal formation. As with the sole trader structure, partners are responsible for any losses the business makes and any charges it incurs. It is worth noting that you are responsible for losses incurred by other partners also, so be wary who you enter in partnership with. If supplying larger businesses, their conditions may require you to incorporate before they will utilise you as a supplier. Partners share in the business’ profits and must be registered with HMRC, file a self assessment tax return each year, paying income tax on their share of the profits as well as national insurance. A calculator from business made simple states that if you are earning in excess of £20,000 in profits you will be better off by registering as a limited liability company. I would always recommend having a good partnership agreement in place to govern what will happen in the event of a partner leaving the business.
A limited partnership consists of a mixture of ordinary partners and limited partners. This is where the admin begins to ramp up slightly, limited partnerships need to be registered at companies house. As the profits will still be split between partners and income tax paid, you don’t need to file accounts or make an annual return. As the name suggests – limited partners are afforded protection against the businesses debts whilst ordinary partners are not.
Limited Liability Partnerships (LLPs)
If you do not wish to be personally responsible for the losses or debts of a business you can set up a limited liability partnership. There are a minimum of 2 designated members and all partner responsibilities should be set out in a LLP agreement. A LLP must be registered with companies house, file an annual return and accounts with companies house. When the LLP is registered, companies house will inform HMRC so there is no need to contact them separately.
Private limited company
This is the ‘biggest’ and most complex type of business structure mentioned so far however it also provides the most security, credibility, scalability and tax benefits. The most common formation is ‘private limited by shares’. The limited company is an entity that is responsible for running your business. You become an employee of the entity and most likely you will appoint yourself as a director – responsible for running the company. Any profit that is generated is owned by the company and after it pays corporation tax the company can share its profits. Corporation tax for profits below £300,000 per year is currently just 20%. Bear in mind that although you may not be personally liable for the business’ debts, lenders may request a personal guarantee against funds: this can put your assets at risk.
With all business types you must register for VAT if the turnover will exceed £82,000 per year. Your accountant will be able to advise on when is best to register. My advice is, if cash flow is good, then you do not need to register for VAT until the threshold is breached. This way you will not have to pay VAT on sales but can retrospectively claim VAT against any purchases made in the last 4 years.
When or if the time comes to sell your company the government has an entrepreneurs relief scheme, allowing just 10% tax to be paid on capital gains up to 10m in your lifetime.
A note on the author
This article was written by Robin Knox, CEO & Co-Founder of intelligentpos®: producer of small businessiPad EPOS software. Robin worked as a manager in retail and hospitality before starting up several small businesses. Today his mission is to provide small business owners with a powerful, affordable EPOS solution to help them run their businesses more profitably.
Information contained within this article may not be accurate and the author and connected companies do not accept liability for advice given should it be incorrect or cause losses. Information was correct at time of publishing to the best of the authors knowledge and may become irrelevant over time.