When starting your business, you will need to think about how you will structure it to ensure it is both compliant and tax efficient.
There are a number of different ways you can structure a business, and the kind you choose will depend on a number of factors. The most often used frameworks for companies are sole trader, limited company (LTD), and a limited liability partnership (LLP), and we examine each in further detail below.
If you are the sole owner and operator of the business, you may wish to opt for the option of being a sole proprietor.
This is the easiest way of getting set up and running, and means you can start trading instantly. If you are entering a business such as a photography or cleaning business in which you will be the sole employee, getting started as a sole trader may be the best option. You are responsible for filing your self-assessment and paying any taxes due, but no corporation tax. There are some disadvantages to this company structure; firstly, you are not a separate entity from your business in the eyes of the law. This means that should you not be able to pay debts or you encounter difficulties, you will be personally liable, and collectors can seize your own assets if required.
If you want to grow your business, you can choose to form a partnership (essentially an agreement made between two sole traders), or incorporate your business to form a limited company.
It can often be the case that those who want to hire people and build a bigger business than a one-person band may opt to incorporate a company straight away. For others operating as a sole trader, moving to a limited company structure as the business starts to grow is the more tax efficient mode of operation. This is because the tax threshold changes with earnings, not to mention the higher the profit, the more there is at risk should anything go wrong. Whatever the reason, incorporating a business is a common process, one that is made straightforward when carried out with the help of a formation agent.
When you incorporate a company, it is registered with Companies House. Operating as a business as opposed to a sole trader can make it easier to borrow money should you need to, and it helps to build your credibility. You will become the director and the sole shareholder if you wish, although people can buy into your company by purchasing shares as well. Your liability is lessened, because you and your business become a separate entity. This lessens your financial risk substantially, as you are no longer liable for company debts and finances. Limited companies are required to pay corporation tax, and directors are taxed as employees rather than sole traders, which often makes it a more tax efficient method of operation.
There is however, more administration and paperwork associated with this company structure. You will have to file company accounts annually, pay PAYE and NIC contributions, and complete and submit a company tax return each year. Depending on the size of your company, you could employ a company secretary to take care of all of this administration for you.You should also note that a limited company is different from an umbrella company.
A limited liability company provides the limited liability that is available to the shareholders in limited companies, but with the taxation model and flexibility to those who have formed a partnership.
In essence, this business structure protects the assets of shareholders, but does not provide the same tax advantages (in a partnership, the share of profit is taxed as personal income as usual). Many companies in the financial and legal sectors choose this hybrid business structure.
Ultimately, whether you choose to enter business as a sole trader, a partnership, a limited company or limited liability partnership will depend on a number of different things. Working with a formation agent will help you decide which is ultimately the most suitable structure for your new business. What’s more, they will be able to handle all of the start-up paperwork to get you up and running quickly and with minimum hassle.
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