Choosing the right business structure
You already know there are lots of different ways to structure your business. Whether you’re just starting up, or your business is growing and changing, it’s a good idea to regularly review your business structure. At THP, we can advise you on the pros and cons of the following business structures:
- Sole trader
- Limited company
- Partnership
- Limited Liability Partnership
Each of these structures have benefits and drawbacks. While one structure may deliver lower taxes and extra profits, it could also mean a lot more red tape and extra costs.
Our accountants can work with you to determine which structure will work best for your business, taking into account factors such as tax, risk, profit sharing and ability to attract investment.
Read on to learn more about each type of business structure, or get in touch now to arrange a consultation with a member of our team.
Sole Trader
This is the most common business structure in the UK. In 2021, there were 3.2 million sole proprietorships – making up 56% of all businesses. This structure is best suited to smaller businesses, usually (though not always) without employees.
Some of the advantages of a sole trader business structure are:
- It’s easy to set up. You just need to tell HMRC that you pay tax via Self Assessment.
- Taxation is simple. You can keep all profits after you have paid tax on them.
- As the sole proprietor, you make all business decisions.
However, there are drawbacks too. One of the most important is liability. That means you are personally responsible for all the business’s debts. This puts your personal assets, including your home, at risk. This is why many sole traders wisely invest in public liability insurance.
A second drawback is that it can be difficult to raise finance as a sole trader. This could make it more difficult for your business to grow. If you are finding it difficult to expand your business, it could be a sign that you need to adopt a new business structure. If so, talk to us today.
Limited Company
If you set up a limited company, your business becomes a separate legal entity. You then become both a shareholder and an employee of the company.
There are many possible advantages of adopting this kind of structure. These include:
- Limited liability. Your personal liability is limited to the share capital you have invested.
- You may pay less tax. You’ll pay corporation tax on profits, which is currently set at a lower rate than income tax. However, you also pay tax on salary and dividends above a certain level, so it’s important to work out whether this business structure really is more profitable.
- It’s easier to attract investment. Lenders see limited companies as being more credible.
- It’s easier to grow. Limited companies are usually much better structures than sole proprietorships for employing other people.
- It’s easier to pass on your business. A limited company allows you to pass on shares to your family and makes it simpler to sell your business to a third party.
These benefits do come at a potential cost, which is why it’s important to seek specialist advice before setting up a limited company. Possible drawbacks of limited companies include:
- Extra administration costs. You have statutory obligations, such as having to file annual accounts with Companies House.
- More complicated tax planning. If you want to take money out of the company, you need to pay yourself a combination of salary and dividends. Tax planning therefore has to balance these with corporation tax and VAT (for businesses with taxable turnover of over £85,000).
- Less privacy. Information such as annual accounts, shareholder names and identities of company directors are published by Companies House.
If you think a limited company structure could benefit your business, get in touch with our team today.
Partnerships
A partnership is very similar to a sole proprietorship. Two or more people work together and agree on what share of the partnership profits each person will get. Those profits are taxed in the same way as a sole trader’s – i.e. via Self Assessment for Income Tax. As with a sole proprietorship, partners are personally liable for the business’s debts. A major disadvantage is that if one partner can’t meet their share of a debt, the other partners can end up having to pay it.
Limited Liability Partnerships
A Limited Liability Partnership (LLP) is like a cross between a normal partnership and a limited company. Partners have limited liability for the partnership’s debts, but also additional statutory and administrative obligations. Individual partners are treated as being self-employed for tax purposes and are taxed on their profit share entitlements.
Generally, the LLP structure is better for larger partnerships, although some may find that a limited company structure is more advantageous. Again, it’s wise to get expert advice before setting up any new structure. Talk to us today if you are thinking of setting up a partnership.
Our expert team is happy to advise you on the best structure for your business. Based at our offices in Wanstead, Sutton, Chelmsford and Saffron Walden, we help businesses across London, Essex and Surrey.
Mark Ingle
"There's something really satisfying about helping a client go beyond just an annual tax return.”
Lee Daley
"When clients call you by your nickname, you know you’re providing a personal approach”
Kirsty Demeza
"I believe in our service, and I know clients feel strongly that we’re worth it"
