How Do I Choose a Business Structure?

Once you choose a name for your business, it’s time to register it legally. This is an exciting part of the process, as you edge closer towards being open for business. But which structure do you go for? There’s no one-size-fits-all when it comes to this type of thing, and what works for a freelance copywriter might be less practical for a builder.

Because this is one of the first major business decisions you’ll make, we get that it feels daunting. Help is at hand though! Let’s look at each business structure, along with their potential pros and cons depending on your circumstances.

Starting up as a sole trader

If you register your business as a sole trader, you’re the sole owner of your business, with full autonomy to run things as you please. Hairdressers, graphic designers, copywriters, and electricians often choose this business structure.

Becoming a sole trader is a popular option as it’s easy to register, and the perfect transition into the world of business and tax.

What are the pros and cons of setting up as a sole trader?

If you plan to keep your business small, staying as a sole trader is most likely the best option – unless you’re in a high-risk industry, such as construction or accountancy.

Once you begin to grow it may be worth looking at options to protect you, your business, and to be more tax efficient with your profits.

In this example, moving from a sole trader structure to your own limited company would make more financial sense, not only in terms of liability but for tax efficiency too.

Bottom line

Registering your business as a sole trader is a good option if your business is low risk with low profits. This is because you’re completely liable if anything goes wrong and being ‘liable’ means any business debts will fall on you.

Having said this, it’s ideal if you’re looking to stay smaller – or you’re just starting out – as you can keep all your profits once you’ve paid tax and National Insurance.

Starting up as a limited company

Unlike a sole trader business, a limited company is legally separate from the people who own or run it (known as shareholders and directors).

Registering a limited company is slightly more complex, as you’ll need to incorporate your business with Companies House. Because you and the business are separate entities, you’ll pay Corporation Tax on behalf of your company while also submitting Self Assessments to declare any income you take from the business personally.

The ‘Ltd’ or ‘Limited’ you use at the end of your company name is what gives the business ‘legal personality’ and you ‘limited liability.’ In other words, if your company ever comes into debt, losses, or has any legal claims against it, your personal assets are protected because they’re yours, not the company’s.

What are the pros and cons of setting up as a limited company?

Bottom line

A limited company is ideal if your business poses a higher financial risk, and you want to protect yourself whilst being tax efficient.

While this all sounds great, it’s worth mentioning that start-up fees and accountancy fees are usually higher for companies!

Starting up as a business partnership

A business partnership is exactly how it sounds. You and your partner/s share responsibility of your business. Your partner can be a person, another partnership, or even a limited company.

You’ll need to decide which one of you is the ‘nominated partner.’ This will be the person who’s responsible for the partnership’s legal obligations, such as bookkeeping and tax returns – so choose wisely!

Once you nominate a partner, they’ll need to register the partnership for Self Assessment as an entity in its own right. Individual partners are responsible for registering themselves.

What are the pros and cons of setting up a business partnership?

Bottom line:

A business partnership is great for two partners or more to share ideas and grow a company in a flexible way. You may find though, like with sole traders, it’s difficult to get investors, and once you earn over a certain threshold it’s less tax efficient.

Starting up as a limited liability partnership (LLP)

A limited liability partnership (LLP) limits the extent to which partners are ‘liable’ for any debt that is incurred within their business. This differs from sole traders and individual partners in partnerships, who are personally liable for any business debts.

There is some liability though, although it’s ‘limited’ to the amount they’ve invested.

Like a partnership, all members manage their own Self Assessment, but they must appoint a minimum of two partners to become ‘designated members’. The designated members are responsible for filing account information and tax, much like the ‘nominated partner’ in a partnership.

This may be a great option if you want to start a business with other partners, while remaining liable for your own investments within the business, rather than the business as a whole.

What are the pros and cons of setting up a limited liability partnership?

Bottom line

An LLP is a great option for reducing liability and is used amongst high-risk industries such as accounting, construction, and law. It does make your business finances more publicly visible though, and if you only have two members, there can be implications if one wants to leave.

Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.