Choosing the right legal structure for your business
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.
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.
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.
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.
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)
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.
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.
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.
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.