Choosing the right business structure

We often have start-ups coming to us for accountancy services that are unsure about how they should set up in business, and most of the time, aren’t aware of the options. Getting it right from the start is key both on a personal level and the future of the business – and tax arrangements differ from one structure to another. So, we thought a handy guide to the available business structures might help those considering starting a new business or those that have recently formed.

  • Sole trader  – as the least complex option, sole trader is a popular choice and holds many advantages. Costs on professional services can be kept down through keeping good records of income and outgoings. The simplicity facilitates easy working out of tax and national insurance liabilities too. However, one important point to consider is that as the business is owned personally, any debts incurred will be personal debts, so personal assets become liable in the event of debt.
  • Partnership – whilst similar to sole trader status, this, as the name suggests, involves two or more people collaborating. This is usually done there are two or more people whose expertise, knowledge or contacts are complimentary and can build a more successful business if done in partnership. the most important thing to do in this structure is to have a Partnership Agreement drawn up which states the terms and conditions of the partnership and what the profit share split will be.  The tax liability will be the same as for a sole trader and any debts jointly attributable to each partner.
  • Limited company – this takes the risk away from personal debt as the company is a separate entity. As a business owner you can also be an employee of the business, which is advantageous when it comes to tax liability. Corporation tax is only paid on profits after deduction of salaries so the tax can be minimised. There are, however, more duties involved in this structure such as statutory accounts preparation and PAYE, so this needs to be taken into consideration.
  • Limited liability partnership  – this option operates in the same way as a company, but has tax liabilities similar to a partnership. It is a flexible option that can be advantageous for some businesses, with benefits including a lower national insurance liability and better cash flow opportunities since tax isn’t payable until 31st January after the end of the tax year.

In all cases, where possible, seek professional advice to ensure you’re on the right track from the outset to avoid potential problems and to aid success.