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Starting a new business is an exciting endeavour that involves careful planning and decision-making. Choosing the right business structure is one of the most critical decisions you will face. The structure you select will impact your business’ legal and financial aspects, as well as its overall flexibility and tax obligations. This article will explore five key questions when considering the best business structure for your new business so you can make an informed choice.
1. What Are Your Long-Term Goals and Objectives?
Before deciding on a legal structure, defining your long-term goals and objectives for the business is crucial. Are you looking to establish a small enterprise or envision rapid growth and expansion? Your business’s size, scope and ambitions will significantly influence your structure choice.
The most common business structures include:
- sole trader businesses;
- partnerships;
- limited liability partnerships (LLPs); and
- limited companies.
Each system has advantages and disadvantages for its business owner.
Being a sole trader is suitable if you are a small, owner-operated business that is relatively low risk. However, be aware that this structure offers little protection for personal assets. On the other hand, limited companies and LLPs provide more robust liability protection and are better suited for larger businesses or those seeking outside investors.
2. What Level of Liability Protection Do You Need?
Liability protection is a crucial factor when choosing a business structure. It determines your responsibility for the business’s debts and legal obligations.
On the other hand, limited companies and LLPs offer limited liability protection due to being classed as a separate legal entity. Shareholders and members are generally not liable for business debts, limiting their risk to their investments in the business. This protection can be a significant advantage, especially if your business carries higher risk levels or operates in industries with potential legal liabilities.
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3. How Do You Plan to Finance Your Business?
Another critical factor to consider when choosing a business structure is how you plan to finance your business. Different structures offer varying options for raising capital and attracting investors.
If you intend to fund your business primarily through personal savings or loans from friends and family, a sole tradership or partnership may be sufficient. These structures are relatively straightforward and do not require extensive regulatory compliance.
However, a limited company structure is often preferable if you want to secure external funding. Limited companies can issue shares and have the flexibility to bring in external investors while protecting the personal assets of the company directors and shareholders.
4. What Are Your Tax Considerations?
Taxation is a critical aspect of any business, and the structure you choose will significantly impact your tax obligations. Each business structure has its own tax rules and regulations.
Limited companies, on the other hand, are subject to corporation tax on their profits. These are generally lower than personal income tax rates. Limited company owners can also choose to pay themselves a salary and receive dividends, which may be subject to different tax rates. This can provide more flexibility and potentially lower overall tax liability.
5. How Complex Do You Want Your Business Administration to Be?
Consider the level of administrative complexity you are willing to handle when choosing a business structure. Some structures, like sole traderships and partnerships, are relatively simple to set up and maintain and require minimal paperwork and compliance requirements.
In contrast, limited companies and LLPs involve more complex administrative tasks, such as filing annual financial statements and maintaining company registers. While this additional administrative burden may seem daunting, it often comes with the benefit of added credibility and legal protection.
A more complex structure, like a limited company, may be suitable if you can handle administrative tasks or plan to hire professionals to manage them. However, a sole proprietorship or partnership might be the better choice if you prefer simplicity and want to minimise paperwork and compliance responsibilities.
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Key Takeaways
Choosing between different business structures is a crucial decision that requires careful consideration. By asking these five key questions about your long-term goals, limited protection needs, financing plans, tax considerations, and administrative preferences, you can make an informed choice that aligns with your business’s unique circumstances and objectives.
You should remember that there is no one-size-fits-all answer, and it is a good idea to make a suitable business plan and obtain expert legal advice to ensure you make the right choice for your new venture.
If you need legal assistance choosing the best business structure for your new business, our experienced business structuring 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.
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