When you start a new business, there are many things to consider. You will need to dictate your value proposition, target market, products and services, operational models and brand name, to name just a few.
Another consideration is how you will structure your business. Typically, this will influence how you set up your business, including your operations and management team. It can also affect financial factors, including your accounting, access to funding and profit-sharing agreements.
Due to the impact your chosen structure can have, it’s essential to carefully select one that works for your needs and preferences.
This guide explains the different business structure types and what is involved with each so you can find the right match for your business.
Sole trader
A sole trader is someone who runs their business individually on a self-employed basis. It’s a common way for someone to start a business, especially if they will be solely in charge of operations.
As a sole trader, you’ll be able to recruit a team to work for you, which can fuel growth. As you continue to expand, you may choose to change the business structure so that the responsibility does not lay exclusively with you.
Sole traders will keep all profit after taxes have been taken. They will also have total control of all aspects of their business, making it ideal for someone who wants to take charge and have the absolute final say across their operations.
However, it also means you have a very high level of duty and, if things go wrong, the buck stops with you as you have unlimited liability. In some cases, running the business can merge with your personal finances, exposing you to risk if you fall into debt. You need to be prepared to handle this, including having an effective business plan and long-term strategy to run it.
Limited company
A limited company is a business registered at Companies House if you are based in England and Wales. It is a separate and distinct legal entity. This separates your company from you, giving you protection as a director and reducing the pressure on your personal finances.
An advantage of being a limited company is the way tax is paid. Companies pay corporation tax at 19% on their profit, which is more tax-efficient than paying income tax as a sole trader would. This may mean your business you pay less tax than a soletrader, but with a limited company the level of administration increases as does the red tape.
Being a limited company does require a set level of admin. There are specific HMRC requirements you need to meet, including submitting regular accounts. For this reason, you may need to appoint accountants and even lawyers to take care of the administrative needs.
Due to the enhanced safety it offers, becoming a limited company is ideal for maturing businesses or when you get past the point of being able to operate as a sole trader. It’s also commonly used by contractors, who tend to become a limited company of one person or join an umbrella company to offer legal protection.
Partnership
In a partnership, a number of individuals sign an agreement, sharing the responsibility of running the business. There is no limit on how many people are part of it.
The agreement should determine how the ownership, profits and liabilities will be split between each partner. It will also dictate how partners may leave the partnership.
After an agreement has been made, the partnership will work similarly to a sole trader. Instead of one person having sole responsibility, control and profit, this will be divided across partners at the ratio set out in the agreement. As a collective group, the partners will take care of the costs and liabilities associated with the business.
If you are pursuing a partnership, it’s essential to work with people you trust and work well with.
Limited liability partnership
A limited liability partnership (otherwise known as an LLP) is a structure frequently used by professional firms, such as legal and accountancy practices.
As defined above, they operate similarly to standard partnerships, but they have limited liability, like a limited company. They will also be registered through Companies House and must fulfil HMRC administrative duties.
When setting up an LLP, at least two partners must be named as ‘designated members’ responsible for filing the annual accounts.
The benefit of being part of an LLP is that the partners in the business are protected to a certain level, more so than a traditional partnership.
Conclusion
When selecting a business structure, it’s essential to understand the implications of each and choose one that suits your requirements.
While a number of businesses may start as a sole trader, the risk of unlimited liability must be weighed up. If you are not comfortable with this exposure, it’s worth considering one of the other options, including becoming a limited company, a LLP or having a partner to reduce your risk.
Once you have chosen a structure, you can then plan your business accordingly, with a complete understanding of the HMRC requirements, tax consequences and profit-sharing.
If you want to find out more about the different types of business structures and the financial implications, we can talk you through the details.