Startup Advice

Choosing the right legal structure for your business

Jack Stratten

Ltd company? Partnership? Self-employed? You need to decide carefully.

So what’s the plan – sole trader, partnership or limited company? As soon as the dust has settled on your decision to start a business, this is the big question you’ll have to answer. Here, we make the decision a little easier by weighing up the pros and cons of each option in the simplest terms.

Sole trader

What’s good?

The simplicity.

As a sole trader, there’s very little red tape. You won’t need to worry about corporation tax, registering with Companies House or the complications that come with running a payroll. And with less admin, you’ll pay lower accountancy fees.

What’s not?

Essentially, you are your business. That means, from a tax, debt and legal perspective, you are personally responsible for everything.

As a result, being a sole trader carries genuine risks. You’ll have to pay off any debt you incur, regardless of the state of your business. And because of the personal legal risks, a comprehensive insurance policy is a must.

Partnership

What’s good?

A partnership operates in much the same way as a sole trader setup, so the benefits are similar.

However, your risk – legal, financial or otherwise – is shared, as is your responsibility and workload.

What’s not?

Partnerships are legally obligated to register with Companies House, so there’s more admin.

Otherwise, the downsides are fairly predictable. Partnerships put a lot of pressure on friendships, and the need for mutual agreement can stifle progress.

Limited liability partnership (LLP)

What’s good?

You get many of the benefits of a limited company.

So, if things go wrong, you’re no longer personally liable. And an LLP is more tax efficient than an ordinary partnership – you can receive income in the form of a salary or dividends.

Elsewhere, as an LLP you’ll find altering the rights and profits of individuals within your partnership much easier than if you were a limited company.

What’s not?

Setting up an LLP is far more complex than setting up an ordinary partnership; it’s also more costly, initially at least.

An LLP is also taxed in the same manner as an ordinary partnership, and so doesn’t reap quite the same benefits as a limited company.

Limited company

What’s good?

It’s often said that a limited company is the most tax efficient option for starting a business. That’s because, if you make more profit than you need to take out of your business, you don’t have to withdraw it – and therefore, you can defer the tax.

Also, the distribution of profits to directors in a limited company can be organised so that a large chunk of it is not subject to corporation or income tax.

In a nutshell, if you’re able to run a successful business, being a limited company will offer you higher take-home pay, and less financial risk. So it’s little surprise that it remains a popular choice.

What’s not?

The price for these benefits is more admin, and more upfront costs.

Tax returns, VAT returns and the submission of annual accounts eats up time and money – your accountant will charge a great deal more for their services. And making changes to the duties and entitlements of individuals within a limited company is far more complicated.