Business structures — which should I use?

Hav­ing made the deci­sion to be your own boss, it is impor­tant to decide the best legal and tax­a­tion struc­ture for your enter­prise. The most suit­able struc­ture for you will depend on your per­son­al sit­u­a­tion and your future plans. The deci­sion you make will have reper­cus­sions on the way you are taxed, your expo­sure to cred­i­tors and oth­er mat­ters.

The pos­si­ble options you have are as fol­lows.

Sole trad­er

This is the sim­plest way of trad­ing. There are only a few for­mal­i­ties to trad­ing this way, the most impor­tant of which is inform­ing HMRC. You are required to keep busi­ness records in order to cal­cu­late prof­its each year and they will form the basis of how you pay your tax and nation­al insur­ance. Any prof­its gen­er­at­ed in this medi­um are auto­mat­i­cal­ly yours. The busi­ness of a sole trad­er is not legal­ly dis­tin­guished from the proprietor’s per­son­al affairs so that if there are any debts, you are legal­ly liable to pay those debts down to your last world­ly pos­ses­sion.

Part­ner­ship

A part­ner­ship is an exten­sion of being a sole trad­er. Here, a group of two or more peo­ple will come togeth­er, pool their tal­ents, clients and busi­ness con­tacts so that, col­lec­tive­ly, they can build a more suc­cess­ful busi­ness than they would indi­vid­u­al­ly. The part­ners will agree to share the joint prof­its in pre­de­ter­mined per­cent­ages. It is advis­able to draw up a Part­ner­ship Agree­ment which sets the rules of how the part­ners will work togeth­er. Part­ners are taxed in the same way as sole traders, but only on their own share of the part­ner­ship prof­its. As with sole traders, the part­ners are legal­ly liable to pay the debts of the busi­ness. Each part­ner is ‘joint­ly and sev­er­al­ly’ liable for the part­ner­ship debts, so that if cer­tain part­ners are unable to pay their share of the part­ner­ship debts then those debts can fall on the oth­er part­ners.

Lim­it­ed com­pa­ny

A lim­it­ed com­pa­ny is a sep­a­rate legal enti­ty from its own­ers. It can trade, own assets and incur lia­bil­i­ties in its own right. Your own­er­ship of the com­pa­ny is recog­nised by own­ing shares in that com­pa­ny. If you also work for the com­pa­ny, you are both the own­er (share­hold­er) and an employ­ee of that com­pa­ny. When a com­pa­ny gen­er­ates prof­its, they are the company’s prop­er­ty. Should you wish to extract mon­ey from the com­pa­ny, you must either pay a div­i­dend to the share­hold­ers, or a salary as an employ­ee. The advan­tage to you is that you can have a bal­ance of these two to min­imise your over­all tax and nation­al insur­ance lia­bil­i­ty. Com­pa­nies them­selves pay cor­po­ra­tion tax on their prof­its after pay­ing your salary but before your div­i­dend dis­tri­b­u­tion. Effec­tive tax plan­ning requires prof­its, salary and div­i­dends to be con­sid­ered togeth­er. There are many advan­tages as well as dis­ad­van­tages to oper­at­ing through a lim­it­ed com­pa­ny. New com­pa­nies can be pur­chased in a ready-made form usu­al­ly referred to as ‘off the shelf’ com­pa­nies. These types of for­ma­tion are becom­ing less fre­quent, how­ev­er, as the speed of which com­pa­nies can now be cre­at­ed takes, on aver­age, 3 hours rather than days. There are addi­tion­al admin­is­tra­tive fac­tors in run­ning a com­pa­ny, such as statu­to­ry accounts prepa­ra­tion, com­pa­ny sec­re­tar­i­al oblig­a­tions and PAYE (Pay as You Earn) pro­ce­dures. A big advan­tage of own­ing a lim­it­ed com­pa­ny is that your per­son­al lia­bil­i­ty is lim­it­ed to the nom­i­nal share cap­i­tal you have invest­ed.

Lim­it­ed lia­bil­i­ty part­ner­ship

A lim­it­ed lia­bil­i­ty part­ner­ship is legal­ly sim­i­lar to a com­pa­ny. It is admin­is­tered like a com­pa­ny in all aspects except its tax­a­tion. In this, it is treat­ed like a part­ner­ship. There­fore you have the lim­it­ed lia­bil­i­ty, admin­is­tra­tive and statu­to­ry oblig­a­tions of a com­pa­ny but not the tax­a­tion and nation­al insur­ance flex­i­bil­i­ty. They are par­tic­u­lar­ly suit­able for medi­um and large-sized part­ner­ships.

Co-oper­a­tive

A co-oper­a­tive is a mutu­al organ­i­sa­tion owned by its employ­ees. One exam­ple of such an organ­i­sa­tion is the John Lewis Part­ner­ship. These struc­tures need spe­cial­ist advice.