Here we cover the options available to you when starting your own business. You should be aware that there are tax and legal implications which have a bearing on the choice you make. If you are starting, or have started a business in Chislehurst, Bromley, Kent and London areas we, at Adiva Accountants in Chislehurst, can help you decide on an appropriate business structure.
The most suitable structure for your business will depend on your personal circumstances and your future plans. The decision which structure to use will have consequences on the way you are taxed, your exposure to creditors and other important matters.
There are five possible options you have as follows:
This is the simplest way to trade. Only a few formalities are required, the most important of which is informing HMRC. You should keep business records in order to calculate profits each year. You will pay tax and national insurance on your business profits. Any profits generated as sole trader are yours. The sole trader business is not distinguished from the proprietor’s personal affairs. So, if there are any debts owed to creditors, you are legally liable to pay those debts down to your last possession.
A partnership is an extension of being a sole trader. In a partnership, a group of two or more people will come together and trade as a single business entity. They would pool their skills, clients and business contacts so that they can build a more successful business than they would individually. The partners will agree pre-determined percentages to share the joint profits. It is important to draw up a Partnership Agreement which sets the rules of how the partners will work together. Partners are taxed on their own share of the partnership profits in the same way as sole traders. Also, same as the sole traders, the partners are legally liable to pay the debts of the business. So, each partner is ‘jointly and severally’ liable for the partnership debts. If certain partners are not able to pay their share of the partnership debts, then those debts can fall on the other partners.
A limited company is a separate legal entity from its owners. The company can trade, own assets and incur liabilities in its own right. The ownership of the company is recognised by owning shares in that company. You are both the owner and an employee of the company, if you work for the company. When a company generates profits, they are not yours, but are the company’s property. If you want to extract money from the company, you must either pay a dividend to the shareholders, or a salary as an employee. A great advantage is that you can have a combination of salary and dividends to minimise your tax and national insurance liability. Companies pay corporation tax on their profits after paying your salary. But this is before your dividend distribution. To achieve the best tax planning it is important that profits, salary and dividends are considered together.
Trading as a limited company has many advantages as well as disadvantages. We have a separate factsheet on ‘What are the main benefits of incorporating your business’. This factsheet considers the merits as well as the downsides of operating as a company.
It is easy and cheap to purchase a ready-made company, which are referred to as ‘off the shelf’ companies. However, there are additional administrative factors in running a company, such as statutory accounts preparation, company secretarial obligations and PAYE (Pay as You Earn) procedures. Probably the biggest advantage of owning a limited company is that your personal liability is limited to the nominal share capital you have invested.
Limited liability partnership
A limited liability partnership (LLP) is legally quite similar to a company. It is administered like a company in all its aspects apart from taxation. In taxation matters it is treated like a partnership. So, LLPs have the limited liability, administrative and statutory obligations of a company. But not the taxation and national insurance flexibility. TLLPs are suitable for medium and large-sized partnerships.
A co-operative is a mutual organisation owned by its employees. John Lewis Partnership is an example of such an organisation. These structures need specialist advice.