Do you want to start your own business now?
Starting your own business is an exciting process. However, one thing you need to do before you get the ball rolling is to decide on the structure of your company.
In the UK there are three main types of business structure; sole traders, limited companies and business partnerships. Each structure has its advantages and disadvantages, so understanding the differences between them is essential when deciding which one works best for you.
A sole trader is someone who is self-employed, and who runs their business by themselves. You can hire other people, but you’re the sole person in charge.
One of the advantages of being a sole trader is that you don’t need to register with the UK’s official registrar, Companies House. This means it’s a quick and simple process to start trading. All you need to do is advise HMRC of your status as a sole trader, and register for self-assessment tax returns. You can hire an accountant to fill out tax returns, but many sole traders have simple returns which they can file themselves.
Being a sole trader is useful for when you simply want to earn money and pay tax on your profits. However, it does mean you’re personally liable for all financial losses, and if you earn more than £50,000 per year, being a sole trader isn’t always the most tax efficient structure.
A limited company is a structure set up by one or more owners, where the limited company constitutes a ‘legal person’. This phrase, ‘legal person’, means a limited company has rights, obligations and finances which are separate to those of its owners.
This separation provides some financial protection to owners. The term ‘limited liability’ applies here, which means a director’s personal financial liability to the company is limited, usually to their initial share value, or another agreed upon sum. This means directors aren’t required to use their personal funds to cover all company debts.
A limited company needs to be registered with Companies House, meaning it does require more paperwork and administration, and often an accountant. There are also more legal responsibilities to being a director in a limited company than being a sole trader.
Unlike being a sole trader, where you pay income tax on profits, limited companies pay corporation tax, which can be more tax efficient. You can also protect your company’s registered name, as no other limited company can be registered in the same name.
There are two types of limited company, public and private. Public companies have stock which investors can buy and sell on the stock market, while private companies have shares which are not publicly available, and are managed by those who own the business.
A partnership is where two or more individuals share ownership of a business. Partners can invest their own money into the business, and receive a share of any profits or losses.
There are two types of partnership.
In a general partnership, all partners are personally liable for business debt. General partnerships don’t need to be registered with Companies House, only with HMRC.
In a limited partnership, like in a limited company, partners are not personally liable for all debts incurred by the business. A limited partnership, however, does need to be registered with Companies House.
Partnerships can be complex, and require the trust and co-operation of all partners involved to make sure they operate smoothly.
There are other types of business structures, but these are the most well-known.
Making a decision on your company’s structure is one of the most important steps towards running your own business. Make sure you take your time, think about the implications, do your research, consult others and come to an informed decision. That way, you can get to work knowing you’ve chosen the right structure for your business, and for you.