The structure you choose when starting a business affects various aspects of its operations, such as your tax obligations, how you settle those obligations and how you register your business with HMRC.
Each business structure comes with its own set of pros and cons, so the best choice will depend on your specific circumstances. This article explores the different types of business structures available and the key factors to consider in choosing the business structure that suits you best.
Self-Employed
A lone trader operating his own business is referred to as a self-employed business structure. Under this arrangement, the individual is the only proprietor and is in charge of all business matters, including debts, gains, and losses.
The self-employed business structure has several important features, such as:
- Total control: The person oversees daily operations and makes all business decisions.
- Taxes: Self-assessment is used to pay taxes, and business profits are regarded as personal income.
- Liability: Owner liability is unrestricted, which means that personal assets may be utilized to pay off business debts as needed.
- Registration: Self-employed people are required to file an annual self-assessment tax return and register with HMRC.
This structure is popular because of its adaptability and simplicity, particularly for small businesses, independent contractors, and freelancers.
Limited Company
A limited company is a type of corporate organization in which the company and its owners, or shareholders, are two distinct legal entities. Due to this division, the company’s debts and liabilities are borne by it rather than the people who manage it. Private limited companies (Ltd) and public limited companies (PLCs) are the two primary forms of limited companies.
Important characteristics of a limited company structure include:
- Limited liability: The personal assets of the owners (shareholders) are safeguarded, and their liability for the company’s debts is limited to the amount they invested.
- Independent legal entity: The business can enter into agreements, hold property, and face legal action apart from its owners because it is an independent legal entity.
- Taxation: Dividends received by shareholders are subject to separate taxation, and the company pays corporation tax on its profits. Dividends and salaries are frequently used to pay directors.
- Formalities: A limited business needs to produce yearly reports and accounts and register with Companies House. Compared to a sole trader, there are more stringent reporting and compliance requirements.
- Ownership and management: Directors may oversee a limited company that is owned by one or more shareholders. A single individual may hold dual roles as a director and shareholder in small businesses.
Businesses looking for expansion, investors, or protection from personal financial risk are fond of this structure.
Partnership
In a partnership business arrangement, two or more individuals (or entities) collaborate to manage a business. Each partner in this arrangement is equally accountable for earnings and losses as well as decision-making.
Main features of partnership structure:
- Shared ownership: Although agreements may differ, partners jointly own and run the business. Decisions are usually made together.
- Profit sharing: Profits are divided among partners, usually in accordance with a set agreement or ratio.
- Liability: All partners in a general partnership are subject to unlimited liability, which means they are each individually responsible for the debts and liabilities of the business.
- Taxation: In the majority of partnerships, the partners’ portion of the earnings is reported on their individual tax returns after the gains are passed through to them.
- Legal formalities: Although partnerships may need a partnership agreement defining roles, profit-sharing, and processes for resolving disputes or dissolving the partnership, they are typically easier to set up than limited businesses.
Professional services enterprises (such as law firms and accountancy practices) and small businesses with several persons who wish to share tasks and pool resources frequently use this form.
Limited Liability Partnership
An LLP is a type of business organization that combines the limited liability protections usually associated with a limited company with the flexibility of a traditional partnership. It is intended for professional associations, such as those of consultants, accountants, or attorneys, who wish to collaborate while limiting their individual liability.
Key features of an LLP:
Restricted responsibility: Liability for each partner is capped at what they have invested in the company. The LLP’s debts are not individually owed by the partners, unless there is fraud or unethical business.
Different legal entity: An LLP is a different legal entity from its partners, just like a limited company. Hence, the LLP is able to sign contracts, own property, and face legal action in its own name.
Flexibility in management: An LLP allows for flexibility in how roles, duties, and profit-sharing are arranged inside the internal structure. There are no strict legal guidelines; these are usually outlined in an LLP agreement.
Taxes: In an LLP, the partners split the profits, and each is responsible for paying taxes according to their portion. The LLP is a tax-transparent structure since it does not pay corporate tax on its own.
Registration and compliance: Like limited companies, limited liability partnerships (LLPs) must register with Companies House in the UK and submit yearly accounts and financial reports. They are not, however, governed to the same extent as a business.
Professional associations that want limited liability protection and flexibility in their partnership structure frequently select limited liability partnerships (LLPs).
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