When it comes to following your entrepreneurial dream, choosing a legal business structure might not be as exciting as creating a website, brainstorming business names, or designing your very first products.
It can be tempting to just pick whichever structure sounds easiest so you can tick it off your list and get back to planning your launch.
However, the legal structure you select will have a profound impact on many aspects of your business, from how much admin you have to tackle, your financial reporting responsibilities, and the amount of tax you pay, to the extent of your personal liability if the business makes a loss.
And while it is possible to change structure further down the line, doing so can be a complicated process, which is why it’s far simpler to choose the right legal setup for your business sooner rather than later.
So, how do you decide which is the right business structure for you?
We’ve outlined the most common business structures available to UK business owners, so you can see the pros, cons, and responsibilities that each entails, and make the best decision for you and your budding enterprise.
There are four main business structures for UK business owners.
Sole Trader
This is a common choice for freelancers, consultants, and other people who decide to work for themselves and it’s surprisingly easy to set up.
All you have to do is register your business with HMRC, ideally as soon as possible after you start trading, but by 5 October following the end of the tax year in which you started trading.
As a sole trader, you can keep the profits you make in the business as income, but you will have to set a chunk aside to cover income tax payments and national insurance contributions. These will be calculated after you submit your Self Assessment Tax return — a task that might sound daunting but is actually fairly straightforward for sole traders.
While the simplicity of this structure and the reduced filing responsibilities add several ticks to the pro column, there are downsides. The most serious of which is the issue of liability; as a sole trader and owner of the company, you accept unlimited liability for any debts incurred by the business or any legal action taken against it. This could place your personal assets, as well as any assets you own with another person, at risk.
Limited Company
Forming a limited company, on the other hand, provides you with a degree of separation from the business. In the event of legal action or financial difficulties, it’s the business that takes the hit, rather than you personally, which means your personal assets remain protected.
This is one of the factors that encourages many sole traders to eventually take the leap and register with Companies House as a limited company.
And the advantages don’t end there: as a limited company, there are tax advantages that sole traders don’t have.
Here too, however, there are disadvantages.
There are more obligations to fulfil, from the structure of the company, which must have an office registered in the UK, appoint at least one director above the age of 16, and issue at least one share at the time of incorporation, to the company’s financial filing responsibilities.
Limited companies are required to be fully transparent with their financials, by making records available to the public on the Companies House register. And while transparency in business is no bad thing, it does involve additional administrative duties.
If you think that registering with Companies House might be the right option for you, but are worried about the complications for the extra admin, it’s worth remembering that while there will be a slight learning curve, it’s not as scary as you might imagine, especially if you have an excellent accountant on hand to keep you right, and if you invest in the right software to make the process easier.
For example, Clear Books online accounting software allows you to automatically generate financial reports and submit Making Tax Digital VAT returns with relative ease, even for those who have little to no experience of bookkeeping and accounts.
Partnership
If you are not the only person involved in the creation of your business, a partnership model might be the right choice for you.
This legal setup involves two or more partners that share everything in the business, from the profits and the responsibilities to the risks and the losses.
Much like the sole trader model, the partners are required to register with HMRC and to complete an annual Self Assessment Tax Return — and they will each have to pay NI contributions and tax on their share of the profits.
Their personal assets are also at risk in the case of losses, bankruptcy, or legal action taken against the business, no matter which of the partners might be accused of negligence or misconduct.
Limited Liability Partnership
An LLP is a partnership that’s registered with Companies House as well as HMRC and as such the partners don’t just have to submit personal Self Assessment Tax Returns each year, but have the additional admin of preparing and filing annual accounts. Again, the complications of this can be largely mitigated by having the right accounting software and support from a reputable accountant.
It’s also worth considering the longevity of your partnership. As an LLP can only operate with two or more partners, you could find yourself in trouble if your partner decided to walk away from the business, leaving you with no option but to dissolve the company and start again.
As with the Limited Company options, the key pros here are that the partners’ personal assets are considered separate and protected from any issues the business may face and that partners’ can take advantage of tax benefits.
Choosing the right business structure for your business can feel like a complication you’re simply not ready for, but as you can see from the pros and cons we’ve covered here, it’s important to make the decision as soon as possible so that you can fulfil your legal obligations and protect your assets as necessary.
And if you’re in any doubt at all over which option to choose, we’d always recommend talking to an accountant or qualified business advisor.
No matter what you decide though, know that we’re here to help you every step of the way with our easy-to-use software that makes financial admin a breeze, whether you’re a sole trader, limited company, or partnership.
Clear Books Online Accounting and Payroll Software
Clear Books is award-winning online accounting & payroll software for small businesses. Thousands of business owners, contractors, freelancers and sole traders across the UK use our easy-to-use online accounting software to manage their business finances. All users benefit from the outstanding free telephone and email support. Clear Books was launched in London in 2008 and offers a free 30 day trial with free ongoing support and bank feeds. We’re rated as ‘Excellent’ on Trustpilot.
Get a free 30-day trial of Clear Books online accounting software here.
