What is the Right Company Structure for my Business?
Choosing the right company structure for your business can be a confusing decision to make as a startup. The choice you make can have lasting legal and tax implications for your business, so it is important that you have all the knowledge and advice you need to help you to make the best-informed decision for you.
There are several different company structures to choose from: Sole Trader, Partnership, Limited Liability Partnership, Community Interest Company and Limited Company, to name but a few. Each structure has its own benefits and disadvantages, so it’s all about finding the right structure to suit your needs.
Sole Traders and Partnerships
A sole trader is someone who works for themselves and is the exclusive owner of a business, entitled to keep all profits after tax. Sole traders do not have a separate legal existence from their owner – in effect, you are your business. Partnerships are similar to Sole Traders, only they have more than one owner. Some advantages of setting up in this way are:
• Exemption from filing Companies House forms
There are no registration fees as there is no need to register with Companies House – all a Sole Trader needs to do is register as self-employed with HMRC.
• Profit Retention
Sole Traders keep all the profits they make, and personally own all of the business’ assets, rather than having to leave them in the business. Also, owners are able to withdraw cash from the business without tax effect (as if it is a personal bank account).
• Simplified accounting
While a Sole Trader must complete an annual Self-Assessment, there is no requirement for formal annual accounts, or a Corporation Tax Return.
Fewer accounting obligations means lower accountancy costs
There are some important disadvantages that also need to be considered such as:
• High personal financial risk:
An important disadvantage to be aware of when choosing to set-up as a Sole Trader is that the owner is personally liable for business debt. In the worst case, this may mean they risk their home, personal savings and any other business or personal assets.
• Can be harder to expand
Sole traders often struggle with expanding their business because there is less information available in the public domain about their business.
• More difficult to sell
Because it is difficult to separate the business from its owner, Sole Traders can be more difficult to sell.
A Limited Company is a separate legal entity to the business owner and has its own responsibilities, with its finances separate to its owner’s personal finances. Limited Companies also come with a whole host of benefits including:
• Lower personal financial risk:
Because the business is a separate legal entity, the owners are protected from the threat of personal financial losses if things go wrong
• Higher take-home pay
Tax efficiencies surrounding Limited Companies may mean you can take home more pay than other structures
• Tax planning
Various tax planning opportunities exist which can be tailored to your circumstances where applicable, to deliver significant tax savings
Setting up a Limited Company also has some disadvantages:
There are greater statutory obligations, such as submission of Annual Accounts, Corporation Tax Returns and VAT Returns. And the company must be registered with Companies House.
Because of the range of statutory obligations, there are usually higher accountancy costs if you don’t get things right, higher financial penalties
Limited Liability Partnerships (LLPs)
In an LLP, business profits are shared between partners, and each partner pays tax on their share of the profits. Members are protected and are not personally liable for any of the business’ debts. Advantages include:
• Less Liability
Liability is spread over the partners, and each limited partner is only liable up to the amount the initially invested in the business.
• Tax Benefits
While each individual partner must file taxes, the business itself doesn’t have to, which provides great tax breaks for the company.
• Great Flexibility
Each partner in the business can decide how much they want to contribute and how much of a partner they truly want to be in the business. There are no requirements for board or general meetings or decision-making by resolution.
Some disadvantages are:
• Member Restrictions
An LLP is required to have at least two members. If a member decides to leave the partnership the LLP may have to be dissolved.
• Disclosure to Companies House
Annual accounts must be submitted to Companies House for the public record.
Community Interest Companies (CICs)
A Community Interest Company (CIC) is a limited company designed to benefit a community rather than private shareholders. Business assets are “locked” and can only be used for the community purpose. Some advantages of CICs are:
• Less Regulation
Unlike charities, CICs do not have to have their accounts audited (unless the company’s annual turnover exceeds £5.6m). This makes it perfect for companies that want to identify themselves as ‘not for profit’ to attract funding, but want to start small.
• Limited Liability
Like Limited Companies and LLPs, CICs benefit from limited liability, so directors are protected from personal financial losses.
Disadvantages of a CIC structure are:
• No Tax Benefits
Unlike with charities, there are no tax concessions for CICs.
The assets in the CIC can only be used for the community’s benefit, which can be restrictive.
We hope this article has shed some light on some of the different structure options available for your business. If you would like more information, and a recommendation of the right business structure for you personally, contact us for a free, no obligation meeting. We can talk you through the intricate details of the different structures, and help you to compare the tax efficiencies and legal benefits of each, so that we can help you to find the perfect solution for you.