Often start-ups overlook the importance of their business structures upon their future successes. Overall, the decision to structure a business can affect company growth, the amount of tax paid, the extent of liability owed, the legal requirements needed to satisfy each form and the sheer volume of paperwork. If your business is to survive, it is pivotal you consider, or allow Linkilaw to consider on your behalf, what structure is best suited to help your entrepreneurial offspring flourish.
Below are a basic summary of some different business structures available for burgeoning entrepreneurs;
- Soletrader: this type of company is inexpensive to form. It is predominantly made up of a single owner, who is wholly responsible for any loses incurred, and sometimes employees. There are no fees or dues owed to register with HMRC, a minimal amount of red tape and the perks of naming rights. The owner must be registered as self employed, submit tax returns and pay income tax.
- Examples: small retailers, Internet entrepreneurs, small manufacturing businesses.
- Cost: no startup cost.
- Tax: income tax on profits, and VAT if profits are in excess of £83,000 p.a.
- Partnership: this model is an extension of the type above, but is created when two or more people (up to 20) form a company together. All partners must be registered as self-employed, submit separate tax returns, and also name the company when registering. It is inexpensive and easy to form, but general partners share unlimited liability, even if one partner is entirely responsible for sinking the company.
- Examples: small law firms, medical offices, real estate offices.
- Cost: no startup cost. However, paying a lawyer to draw up a partnership agreement is advisable.
- Tax: each partner pays income tax on his/her share of the profits.
- Limited Liability Company (LLC): this structure requires more administrative duties to be formed, with a document filing required to Company’s House. The LLC makes it easier to borrow money, and also limits the liability incurred by members (similar to shareholders) to just the monetary value of their shares. Typically, the operations of the LLC are governed by an operating agreement that outlines processes for dealing with members withdrawal and dissolution. This model tends to suit companies, who are unaware of how they will grow in coming years.
- Examples: Accenture, Axis Technology.
- Cost: ranging from £40 – £100.
- Tax: each partner, or employee, must pay income tax, national insurance. The company pays 20% in corporation tax.
- Limited Liability Partnership (LLP): This type can be viewed as the lovechild of a Partnership and a LLC. It has the limited liability of the LLC, but the flexibility of a partnership. The number of partners is unlimited, but two must be registered as designated members, who are responsible for publishing accounts. The share of profits paid to partners is taxed as income. General partners can be liable for all debts incurred, whereas limited partners are liable for the monetary value of their shares. The LLP must start trading in a year from registering, or it will be at risk of being struck off.
- Examples: The ‘big four’ accountancy firms, multinational law firms, other professional service firms.
- Cost: ranging from £40 – £100.
- Tax: shareholders and employees pay income tax and national insurance. The corporation pays 20% corporation tax.
This piece provides a snapshot into some of the complexities surrounding different business structures. Please do not hesitate to reach out to us and book a free consultation with one of our legal advisors. We will make a free assessment of your business’s legal needs and provide you with expert advice on the best possible structure for your business to ensure it thrives.
For the latest HMRC figures see: https://www.gov.uk/government/organisations/hm-revenue-customs/about/statistics