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Choosing the right business structure

 

kids

Business structure is the most important ignored aspect which is the most important part of business fundamentals. Often people take advice from friends and family and those who do not have legal authentic knowledge.

This becomes very clear when the tax bill arrives, or something does not work out in the business. Entrepreneurs have the option to search for this information on the web. Sometimes it is to technical and not in simple understandable format.

The business legal structure needs to be considered once your business plan and cashflow forecast is in place.

Other business legal structures like community interest companies and co-operatives do exist.

Sole trader

A sole trader is ‘self-employed’ therefore they must register with HM Revenue & Customs (HMRC) for self-assessment as soon as they start trading.

They are responsible for running their business and abiding to the attached legal requirements and  able to employ staff. Being a sole trader means you are responsible for any debt, but get to keep all the profits after tax.

Being a sole trader means you retain full control of your business and its fairly cheap and easy to set up.

However, you are liable to pay income tax and National Insurance depending on thresholds met by your profits.

Do not need to register your business with companies house and so do not need to file Annual Reports with Companies House

Partnership

Being in a partnership means responsibility and management is shared and so is the profit, on which tax is paid separately on each share.

A partner does not necessarily mean a physical being, it can be a limited company for example who count as a ‘legal person’ and can also be a partner.

The three main steps in setting up a business partnership is to:

  • Choose a name
  • Choose a ‘nominated partner’ – who is responsible for managing the partnership’s tax returns and record keeping.
  • Register with HMRC

You are not required to draw up a partnership agreement, but it is usually a good idea to set out all the conditions under which you have agreed to start the business.

The liabilities, ownership, sharing of profits and conditions on partners wanting to leave are all outlined on the partnership agreement document.

Partners are required to register as self-employed and submit a separate tax return. Usually all partners are fully responsible for all debts owned by the business.

Limited liability partnership (LLP)

In this structure the number of partners is not limited but at least 2 have to be ‘designated members’ responsible for filing annual accounts.

Much like a limited company, the LLP model protects its members’ assets limiting their liability to however much they have invested in the business and any personal guarantees they may have given when raising loans.

As in an ordinary partnership, the members’ share of profit is taxed as income – each member must register with HMRC as self-employed. LLPs must also register at Companies House and there should be a members’ agreement stating what share of the profit each member should receive.

Some or all partners have limited liabilities and exhibits elements of partnerships and corporations.

For:

flexibility: can be incorporated in members’ agreement

Against:

partners must disclose income

LLP must start to trade within a year of registration – or be struck off

 

To find out more about choosing the right business structure contact us at info@sterlingfinance.net or call 0161 339 4989.