Starting a new business can be an exciting time, but with so much information and tasks to be done, you want to ensure that you are doing it right. One of the main decisions you can make for your business at the very start is which business structure is right for your business.
There are four different types of business structures for you to choose from:
- Self employed / sole trader
- Limited Company
- Partnership
- Limited Liability Partnership
Each one is very different, requiring different setups and year-on-year accounting. Here at VASS, our main aim is to help make business as easy as possible and help you as best as we can.
Here is information on each of the structures and the pros and cons of each one.
Self Employed/Sole Trader
Being self-employed or a sole trader is to work as a freelancer or owner of a business, taking responsibility for its success or failure.
This is the quickest route to start your new business and means you keep 100% of profits, but it does mean that you are liable for all business debt.
An annual self-employment tax returns each January, where you pay your Annual Tax and National Insurance, is required.
Pros
Easy to setup
All profit belongs to you after tax and national insurance
Tax reporting is easy to work out
Cons
You are liable for any debts made within the business
It can be harder to find borrowing and finance
Limited company
A limited company is a company that has been incorporated at Companies House as its own entity, operating separately from the business owners.
You would register yourself as a director of the business and, you pay yourself a salary or dividends of the business.
Owning a limited company can be tax-efficient and you would need to pay Corporation Tax at 19% of the business's first £300,000.
Pros
You are not liable for any business debt
It can be easier to obtain credit from lenders
Can save tax (dependant on business earnings)
You will be registered at Companies House, meaning no other business can register with your name
Cons
Accounting is more complicated and may require an accountant
Initial fees will incur during business setup
Not recommended if your taxable profits are below £30,000
Partnership
This business structure is similar to self-employed but allows for two or more people to co-own the business, with each owner being responsible for the business and its debts.
Each partner within the business would be required to pay their portion of taxes and national insurance.
It is advisable to have a formal Partnership Agreement that covers profits, costs, and all other important business decisions.
Pros
Easy to setup
All profit belongs to you and your partners after tax and national insurance
Tax reporting is easy and simple to work out
You can split the business responsibility and start-up capital
Cons
Sharing business profits
You may be made liable for business costs you did not agree to if the partnership fails
It can be harder to find borrowing and finance
Limited Liability Partnership (LLP)
This structure is similar to a Limited company but requires a minimum of two partners, and you and your partners would not be liable for the business debts.
Each partner can have a varying stake in the business depending on what they bring into the partnership.
Each partner is required to pay income on their profits meaning.
Pros
You and the partners of the business are not liable for protecting assets
As the business is registered with Companies House no other business can register with your name
Each partner can hold different levels of responsibility
Cons
Each partner is required to pay income tax on their profits, which may mean the business pays more tax than if the business was a Limited company
Public disclosure of annual accounts
There are many pros and cons to each of these business structures, and it can be complicated to work out which one is best for you and your new business.
Here at VASS, we have a dedicated team of bookkeepers who will be able to discuss the best options for you and your business to get in contact to see how we can help click below