Business Structures

One of the most common questions I get asked in new client meetings is how should I structure my business?  This is not a straightforward question, and I inevitably have to ask several follow up questions to find out the plans for the business. Below is a summary of the type of business structures that you may wish to consider and some of the advantages and disadvantages.

This is the most simple business structure. The business owner registers with HMRC that they are running a sole trader business, and thus are self-employed. There is then an obligation on the business owner to file a personal tax return every year. Profits are subject to income tax and Class 4 National Insurance, a flat rate of Class 2 National Insurance in most cases is also payable.

• Most simple structure.
• Trade losses can be off set against other trade profits and PAYE salary.

• May not be as tax efficient as other structures
• Personally liable for losses in the business

If there are two or more people that wish to go into business together, a partnership is the simplest way to do this. The partnership and the individual partners should all be registered with HMRC, and HMRC will issue unique tax reference (UTR) numbers for the partnership and the self-employed partners. We would always recommend that a partnership agreement is written and signed.

• Trade losses can be off set against other trade profits and PAYE salary.
• Less reporting requirements than a limited company.
• Accounting and bookkeeping fees are generally less than a limited company.

• May not be as tax efficient as other structures
• Personally liable for losses in the business
• Bank accounts may be frozen if any of the partners die.

These can be setup with one director and one shareholder and upwards. If there are more than one directors or shareholders, we recommend that director and shareholder agreements are put in place. Consideration of shareholding should be done prior to setup to ensure no future tax issues.

Corporation tax is calculated from the net profit of the company after tax adjustments such as depreciation. The main saving when comparing sole traders / partnerships to limited companies is class 4 NI.

• Can be more tax efficient than sole traders / partnerships
• Provides a legal veil, as a separate legal entity is created
• Can provide a perception that the business is bigger than it is
• Good vehicle for investors

• More legal reporting requirements
• Have to be more organised when extracting money from the company, e.g. dividends need to be legal
• Can be more costly to administer and higher professional fees
• Can be more complicated to add shareholders than a partnership or LLP
• Accounts are publicly available

These can be setup with Companies House, we would always recommend a partnership agreement is setup. At least two partners are required, however, one can be a corporate entity.

• Taxed in the same way as a sole trader / partnership
• Can bring in additional partners fairly easily
• Provides some legal protection

• May not be as tax efficient as a limited company
• Reporting requirements are more onerous than a straightforward partnership

The above is a brief overview of your options. I would always recommend getting specific advice for your personal circumstances. Choosing the right option at the start of the business can save you a lot of money in the long term.