Choosing Your Business Structure
Who is this for?
This is for you if you want to start your own business and you would like to know the main differences in the business structures that you could use for your business:
- Sole trader
- Partnership
- Limited company
A sole trader is one of the most common structures that people use to set up their business. Effectively it is used where individuals want to set up a business and run it entirely under their sole ownership and control.
Features
- You can trade under your own name or any business name, subject to certain restrictions – read more here
- You must register with HMRC and you have until 5 October of the tax year following the year you started in business e.g. If you started your business on 5 June 2021, you will need to have registered by 5 October 2022
- You will need to complete a self-assessment tax return every 12 months, which is submitted online before 31 January of the year following the tax year covered
- You may also be liable for National Insurance contributions Class 2 & Class 4 (these are calculated as part of your self-assessment tax return and paid along with your tax). Full details here
- There is an annual tax free allowance of £1,000. If your business is small and you do not expect to make more than £1,000 you can use the tax-free allowance, instead of deducting any expenses or other allowances. Read more here
- You pay income tax on any taxable profits that you generate with the main tax bill due by 31 January and possibly an interim amount due by 31 July
- You are personally liable for any debts incurred by the business
- Income by the owner is taken as “drawings” rather than salary or dividends
Advantages
- Setting up your business is reasonably straightforward, with registration on the HMRC website
- There is no need to complete any other business return, as there is with limited companies
- Withdrawing money as the owner is achieved by withdrawing the money direct from the business account – no need to set up a payroll system
- No need to file your accounts as a matter of public record (such as Companies House)
Disadvantages
- You will be personally liable for all the business debts and obligations
- You may pay more tax on your earnings than you would in a limited company structure
- Some customers may think you are not “as professional” as if say you were a limited company
Partnership
In a partnership, two or more individuals own the business and share the risks, costs, and responsibilities. Unlike a limited company, a partnership has no legal existence distinct from the partners themselves.
Features
- You can trade under your own individual names or any business name, subject to certain restrictions – read more here
- Similar to sole traders, you must register the partnership with HMRC and you have until 5 October of the tax year following the year you started in business e.g. If you started your business on 5 June 2021, you will need to have registered by 5 October 2022
- Each partner must also register separately with HMRC
- You will need to choose a “nominated” partner who will be responsible for any tax returns and communication with HMRC
- You will need to complete a Partnership Tax Return (if online, by 31 January annually) with the main tax bill due by 31 January and possibly an interim amount due by 31 July
- Each partner is deemed self-employed and takes a share of the profits
- Partners may also be liable for National Insurance contributions Class 2 & Class 4 (these are calculated as part of your self-assessment tax return and paid along with your tax). Full details here
Advantages
- A partnership is a relatively simple and flexible way for two or more people to own and run a business together
- Each partner needs to register with HMRC as self-employed and register the partnership.
Disadvantages
- As with a sole trader, each partner is personally responsible for any debts of the partnership as a whole, so their assets may be at risk if the business fails
- If there is a disagreement, it can be difficult to resolve and/or continue the business (so it’s a good idea to draw up a written agreement between the partners)
Limited liability company
Limited companies exist in their own right in law and are separate legal entities from the shareholders who own them. However, they may lose the money they have invested in the company if it fails.
Features
- They must be registered (incorporated) at Companies House and have at least one director who may also be a shareholder
- Accounts must be filed annually at Companies House, usually online, along with an annual confirmation statement by the directors
- The directors and secretary are responsible for notifying Companies House of any changes in the structure and management of the company
- Profits are usually distributed to shareholders in the form of dividends
- Companies pay corporation tax and must make an annual return to the Inland Revenue.
- Company directors are employees of the company and must pay Class 1 NI contributions as well as income tax on their salaries (subject to certain thresholds).
- They cannot offer shares to the public (e.g. on the stock exchange)
Advantages
- Shareholders are not (usually) personally responsible for the company's debts – exceptions include where they are also involved in the day to day operations as a director and they act fraudulently
- Sometimes people look on limited companies as being more “professional”
- There can be tax and national insurance savings in running a limited company
Disadvantages
- Directors may be asked to guarantee loans to the company
- There is more administration, cost and paperwork involved – Companies House Reporting Corporation Tax returns
- There is more visibility as information on Companies House is available to the public
Note: The above is only a general summary of the features, advantages and disadvantages of a sole trader, partnership and a limited company and independent professional advice should be sought for individual circumstances.