Your business might go through a variety of structures over its lifetime so it’s always helpful to know what different options there are and what implications they can have.
Types of business structure
The most common types you’ll probably know of are sole trader, partnership or company. But there is more than one type of partnership and company to consider.
A sole trader is a single business owner selling a product or service. However, they can still employ people and use subcontractors. This type of structure is the simplest and involves the least amount of administration work.
You must still keep accounting records and meet your legal obligations. Sole traders are personally liable for any debts of the business. Rather than paying corporation tax, sole traders pay tax on the profits of the business and this is reported through self assessment.
Similar to a sole trader but there must be at least two of you. It’s highly recommended that you have a written agreement between all of the partners.
Partners of a Limited Liability Partnership (LLP) have a reduced financial liability. This structure is popular with property businesses and professional services.
Unlike sole traders or partnerships, limited companies are separate legal entities meaning you’re not personally liable for its debts.
You need to consider which type of company is right for you:
- Company limited by guarantee
- Company limited by shares
- Community interest company
- Public limited company
To give a brief overview, a company limited by guarantee is the smallest company structure and is usually chosen by not-for-profit organisations. Members are usually the directors and it can be easier to change personnel as one director leaving does not majorly change the shape of the company.
Shareholders of a company limited by shares are liable for the company’s debts up to the amount they each have invested. Unlike a PLC, this type of structure gives the owners more control over who has the shares and thus controls the company.
A community interest company is not set up for private profit so you’re unable to take funds out via shares or dividends. However, it can still pay salaries and reinvest its profits back into the business.
A public limited company has shares which are publicly traded and sold. The business needs to be reasonably successful to go down this route as a minimum of 50,000 in share capital is required.
Notifying authorities & paying taxes
Sole traders and partnerships report to HMRC using tax returns whereas companies must also report to Companies House.
Regardless of the size of the company, annual accounts, corporation tax returns and confirmation statements must all be filed. Corporation tax currently stands at 19% of taxable profits. If you’re an employee as well as a director, you’ll have the usual employment taxes to report as well.
If you sell your shares in the company, you may be liable for capital gains tax. However if conditions are met, you can qualify for entrepreneur’s relief thus reducing any capital gains tax liability.
VAT however is based on the annual taxable turnover rather than the legal structure of the business. So if you’re a sole trader, partnership or company and your turnover surpasses £85,000 the business is legally obligated to register for VAT.
If you’d like some advice on business structure personalised to your requirements, call us on 01254 583515 or fill out the form below to arrange a free, no obligation initial appointment.