What’s the best structure for your business?

One of the most challenging aspects of starting a new business venture is deciding which legal structure best meets the requirements of H M Revenue & Customs (HMRC) and other relevant authorities. The set up of your business and the way it operates will affect:

  • All Tax and National Insurance requirements
  • Records and Accounts that must be accurately maintained
  • Methods the business can use to raise finance and funding
  • Decisions about managing the business
  • Your personal financial liability should the business run into trouble

Whilst researching the most suitable business type for my own new venture, I read innumerable details which I’ve gathered together as an overview. If, like me, you are unsure about which structure to adopt, it may be advisable to seek some expert guidance.

The details included below were gathered from a variety of sources, although one website that proved exceptionally useful to me was Business Link .  It is also worth speaking to an accountant and solicitor to discuss what might be the best and most appropriate solution for you.

Self-Employment

If you wish to trade as a sole trader, a partner or a member of a limited liability partnership, you must be self-employed and register with HM Revenue & Customs. All work done for your business must be done on a self-employed basis.

Sole Trader

This is the simplest structure to run a business. There are no registration fees, records and accounts are straightforward to maintain and all profits are kept by the individual. One important negative is that the sole trader is personally liable for any debts that the business incurs.

Partnership

Provides a flexible way for two or more people to share the costs, responsibilities and risks of running a business together. Each partner is self-employed, shares the decision-making, takes a share of the profits and is personally responsible for any debts incurred by the partnership.

A partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, is declared bankrupt or dies, the partnership must be dissolved – although the business may still continue. The negative with this structure is that partners do not have any protection if the business fails, so are liable for any debts incurred.

Limited Liability Partnership

The difference between a Limited Liability Partnership and a Partnership (described above) is that liability is limited to the amount of money invested in the business and any personal guarantees given by each partner to raise finance for the business. Each partner enjoys a degree of protection if the business gets into difficulties, as specified in the agreement when trading commenced.

Limited Liability Company

The key difference is that the company’s finances are totally separate from the personal finances of any owners. Shareholders may be individuals or companies and are not responsible for the company’s debts unless guarantees have been written into the business set-up documentation registered with Companies House. If the company fails, any money invested in the company will be lost as there is no means to recover it.

There are 3 key types:

  • Private limited companies can have one or more shareholders and cannot offer shares to the public.
  • Public limited companies (plc) must have at least two shareholders and must issue shares to the public to the value of at least £50,000 before it can trade.
  • Private unlimited companies are usually created for specific reasons and are rare.

Franchise

Buying a franchise is a method of taking advantage of the success of an established business. You buy a licence to use the name, any products or services and any existing management support systems. The licence usually covers a specific geographical area and runs for a limited time, after which you must renew it in line with the terms of the franchise agreement.

Purchasing a franchise is usually via an initial fee, ongoing management fees, a percentage of your turnover, the purchase of goods from the franchiser or a combination of the above.

Franchise businesses take different legal forms – most are sole traders, partnerships or limited companies. The terms of the franchise agreement dictate your freedom to manage the business.

Social Enterprise

Is a type of business with social objectives. Most of the profits are reinvested in the business (or community) rather than given to shareholders and owners. Types of social enterprises include worker-owner co-operatives, leisure centres, housing associations and community development trusts.

Choosing your business structure is one of the most important decisions you will need to investigate. When making your decision, consider whether your activity is a business or a hobby from which you hope to earn some money. To be able to claim business deductions and expenses, you must be carrying on a business. Set-up costs, tax implications, ongoing administration expenses and your personal liability should be taken into account as part of the decision-making process.

Whatever your findings, it is recommended that you consult a professional business adviser, accountant or solicitor for advice before registering with the necessary authorities.

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