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As a business owner, you should familiarise yourself with the common structures available for your business. The business structure that you choose will influence your personal liability, tax obligations, and financing opportunities for your business.
This article will go through the four most common business structures and touch on some of the advantages and disadvantages of each.
What is a Business Structure?
‘Business structure’ refers to the legal structure of your business. This will set out the way that your business will pay tax on income and deal with any liabilities. The four most common types of business legal structure are:
Each of these different structures has pros and cons. Therefore, deciding which is best for you depends on your business priorities at a given time. It is worth noting that you can always change your business structure if need be.
What is a Sole Trader?
A sole trader business structure is where one person owns a company and is in charge of its operations. This structure is commonly used by business owners who plan to work alone. There are several advantages if you are in this position.
For example, a sole owner has complete control over business decisions, without needing to discuss plans with partners or co-owners. This allows you to experiment with ideas and take risks. Tax reporting is much easier, and it is easy to file yourself as a sole trader. In many ways, it is similar to being self-employed.
At the same time, however, a sole trader will pay income tax on any profits. As a result, any profit over roughly £45,000 will be taxed at the UK income tax rate of 40%. Any earnings over roughly £150,000 will be taxed at 45%. If you were not operating as a sole trader, you would likely have to pay corporation tax instead.
Because of this, a sole trader structure is beneficial if you are either just setting up your business, or you are running a small business for yourself (for example, a small retail business).
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What is a Partnership?
A partnership model is similar to a sole trader structure, but there are at least two partnered owners within your business. You will sign a partnership agreement, which establishes how you will share liabilities and profits.
The primary advantage of a partnership model is its simplicity. However, you will still have personal liability for business debts – though the liability will typically be shared between the partners, per your partnership agreement.
This structure is also good for small businesses, however, you may want to structure your business entity in a way that makes you pay corporation tax on profits rather than income tax. To do this, you may want to set your business up as a limited company.
What is a Limited Company?
A limited company refers to a business registered with the Companies House and set up as a separate legal entity. This means your personal assets are separate from any business assets. The Companies House is the UK regulatory body that keeps a register of all companies.
A limited company will pay corporation tax (which is at 19% of profits) instead of income tax. This can be beneficial if your company is bringing in large amounts of money. However, you will still need to pay yourself in some other way which will be taxed. For example, you can pay yourself through dividends in the shares that you own in your company.
By having a limited company, you will also be able to issue shares to potential shareholders. This can help you finance future expansion of your business. This opportunity, however, comes with more complex administrative requirements. For example, you may need to file an annual company tax return. This will usually require you to hire an accountant.
What is a Limited Liability Partnership?
A limited liability partnership (LLP) is a business structure similar to a partnership, but the main difference is that each partner is liable only for their share in the company. An LLP agreement will set out the rights and responsibilities of each partner.
Commonly, businesses such as law firms and accountancy firms use limited liability partnerships. In these cases, the business model relies on the value provided by partners through the service that they offer. A disadvantage, however, is that it can be a more complex way of structuring your business.
Key Takeaways
As a business owner, you should be aware of the different legal structures that you can use for your business. The appropriate business structure for you will depend on your business’s scale and goals. Generally, registering as a limited company is a good way of taking your startup business to its next stage, as it can help you finance operations and expansion by issuing shares to potential investors.
If you have any further questions about business structures, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A sole trader is an individual who trades in their own capacity. In this structure, the personal assets and business assets of the individual are treated as the same.
A limited company is a business that has registered with the Companies House. This model facilitates your ability to designate shares, and it also usually entails a company constitution.
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