One of the fundamental choices you will make, as you take your business idea from concept to launch, is what type of legal business structure is best. This needs to be considered for both the industry you’re entering, and the individuals who may become partners or co-owners. In our experience liability is an issue many fail to consider carefully when choosing the right entity for their enterprise. Take it from us, this is something not to be underestimated, as this post explains. Therefore, we always advocate obtaining the appropriate legal advice for business decisions like these.
The structure you decide upon will affect the steps you need to take in order to be legally open for business. It will also define the way you manage and pay your taxes. There will be rules for taking money out of the company, and very importantly, regulations defining where your personal responsibility sits if the business loses money.
Should your circumstances change down the line, and you realise that a different kind of structure would be more beneficial, don’t be alarmed: it’s allowed.
And there is a specific procedure for each type of entity transformation.
Developing some familiarity with the business law terms affecting proper structural startup is a good place to begin. After all, if you have a better grip on the basics, it will give you a bit of ground floor experience with how to open a company properly. And, taking on the role of an integral participant in the founding process is sure to come in handy as your firm finds its footing in the early years.
Let’s take a look at the more common types of legal business structure available in the UK today:
If you are a freelancer working for yourself, whether you employ staff or not, you are classified as a self-employed Sole Trader. The business is run by you, as an individual, and the after-tax profits are yours alone, as are the responsibilities for any loss. You will file a Self Assessment tax return annually, and pay Income Tax and National Insurance. If your revenue tops £82,000 a year, you must register for Value Added Tax (VAT) with HM Revenue and Customs (HMRC).
An entity you set up to effectively run your business is called a Limited Company, and its income and expenses are kept separately from your own personal finances. After Corporation Taxes are paid, the Limited Company shares its profits with its members. The policies are set and enforced by directors, who may or may not be shareholders; they are, however, legally bound to strive for success, follow rules, keep records, and make certain the books are in order. Each member’s responsibilities are limited by the value of shares they were given (but not yet paid for).
Among the responsibilities you will have, you must:
- register with the Companies House (obtaining a Certificate of Incorporation) and submit yearly returns
- compile annual statutory accounts,
- send HMRC a Company Tax Return. Directors must fill out Self Assessment tax returns and pay tax and National Insurance if they receive salaries.
- register for and pay current VAT rates if your takings exceed £82,000 per year.
Responsibilities are personally shared between yourself and your partner(s), including profits on which the partners each pay their share of taxes. They are also liable for business payables, as well as any losses. A partner can also be a legal entity, such as a Limited Company. Note: In Scotland, partnerships (known as Firms) have an identity separate from their partners.
Registration of the partnership name is made with HMRC, VAT registration is required for revenues over £82,000, and a ‘nominated partner’ must submit the Partnership Self Assessment tax return and keep the company’s records. Each partner files their own personal Self Assessment tax return, and pays their share of income tax on profits.
Limited Partnership and Limited Liability Partnership (LLP)
Both types of partnerships share profits between their partners, each of whom will pay tax on their share of any profits. Both Limited and Limited Liability partnerships send in an annual Partnership Self Assessment tax return to HMRC, while all partners submit a Personal Self Assessment tax return, pay income tax on those profits apportioned to them, as well as National Insurance. Both types of partnerships require registration with Companies House, and maintain a publicly available registered address. An LLP must also create an agreement defining its operating procedures.
The Limited Partnership needs a minimum of one general and one limited partner, each having unique responsibilities and debt liability if that Partnership is unable to pay. A Limited Liability Partnership (LLP) can be incorporated with 2 or more members (which can be either a ‘corporate’ company member or an individual). The defining factor of an LLP is that its members are not personally liable for debts which the company has no ability to pay.