What Structure for my business?
When you’ve decided to start your own business you will need to decide what legal structure you will use for your business. Will it be a limited company, limited liability partnership or a sole trader. Deciding on the legal structure you use will impact the amount that you pay in tax and national insurance and also the amount of risk that you have in the business.
Because limited companies and limited liability partnerships have limited liability you are not liable for the business debts should they fail. But you can be held personally liable for the business debts if you choose to work as a sole trader or a partnership. For that reason generally most businesses tend to use the limited company structure.
There are tax implications as well, generally limited companies are more tax efficient as well and give you greater scope for tax planning and arranging your tax affairs to keep any tax paid to a minimum.
Limited Company
A Limited Company is one of the most popular structures to use for a business. To form a company you need to complete the relevant forms with Companies House and wait between 24 and 48 hours for it to be processed.
A limited company will pay tax on its profits at 19%, although this will increase to 25% on profits over £250,000 in April with a marginal rate relief for profits between £50,000 and £250,000 ,and you will pay tax when you extract the profits in the form of dividends at 7.5% which will increase to 8.75% in April 2022.
One of the advantages of a limited company is limited liability. Limited liability means that you can not be held personally liable for any of the company debt should your business fail. If your business were to fail it would not impact your personal credit rating.
Limited Liability Partnership
A limited liability partnership (llp) is a structure that gives you the same limited liability as a limited company. Having limited liability protects you against being held personally liable for the business debts.
A limited liability partnership as an obligation to file accounts with companies house like a limited company but the partners rather than being taxed under corporation tax rules are taxed under self assessment on a personal tax return.
Meaning that the individuals will be paying income tax at your marginal rate of tax either 20%, 40% or 45% and class 2 and class 4 national insurance at 9. The National Insurance rate is proposed to increase to 10.25% for the tax year starting April 2022.
Partnership
A partnership is generally an informal agreement between a group of individuals that they will go into business together. The rules of the partnership including members and how the profits are divided are normally set out in the partnership agreement. A partnership of this type does not need to make any filings with companies house but does not also benefit from limited liability for the business debts.
For this reason a partnership is not normally used for many businesses outside of family businesses. The lack of limited liability and the informal agreement between the partners mean that in the case of any dispute resolving this may be more difficult without resorting to an extended legal dispute.
Sole Trader
A Sole trader is one of the most popular ways to trade in the UK. It is easy to set up and normally just requires that you contact HMRC and get registered as a sole trader business. There is no obligation to file any accounts with companies house all you need to do is to file a tax return with HMRC each year and pay any taxes that are due.
The ease that it can be set up and the minimal filing requirements make this a very popular way to do business.
But like the partnerships there is no limited liability for the business debts, so if you trade in this way you can be hold personally liable for the business debts should it fail. For that reason if you are going to be going in to business involving large amounts of money or employing people this may not be the ideal business structure for you to use and you may want to form a limited company instead.
Next Steps
If you need help in deciding how to trade in your business or what your best legal structure will be please reach out for a free consultation below.