I will use the wording used in the UK throughout for different business structures but for my US readers it is a case of changing sole proprietor for sole trader and corporation for Limited Company. Click here for a simple explanation of the US System.
In the UK and most of the western world you have four main choices: sole trader, partnership, limited company and limited liability partnership.
The main factor for most people will be the tax savings to be had in the choices but it should not be the only reason. You should also consider other factors just as important:
a) Personal risk
b) The amount of record keeping
c) How your business will be perceived
d) How you plan to develop in the future and exit strategy
Remember you can still be employed and also have self employed income.
Obviously this is the easiest way of running your business, involves registering with HM Revenue and Customs via form CWF1 or by ringing 0845 9 15 45 15. You are taxed on your profits whether you take them out of the business or not and you are taxed under the income tax rules. You will be fined if you do not register within three months of starting a business.
This is the structure that gives you more freedom initially and has less record keeping. You are personally liable for any debts of the business. You have total freedom with the choice of name but as I will explain later it is not necessarily the most tax efficient way of running your business.
The freedom is similar to above and the partners are responsible for the business debts. Therefore if a partner cannot meet the business commitments the remaining partners are liable. Also remember that a partner can enter into binding contracts on behalf of the Partnership. Please seek professional advice and have a very good Partnership agreement drawn up by a solicitor.
This is a good choice in the case of partners in life as the full tax free and rate allowances can be used for the stay at home partner. The partners are “sole traders” in their own right and are taxed individually on their partnership share of profit. The partners must register individually.
Limited Liability Partnership:
This is a registered Partnership with Companies house where the partners limit their liability for business debts. The partners are liable to income tax as self-employed. Income tax is paid on the total profits of the partnership.
This is the preferred form of trading of certain professions where previously they were not allowed to have a limited company or limited liability and when their associations relaxed the rules it could be too expensive to re-structure the business as a limited company, especially if the partnership had accumulated a lot of business assets.
Annual accounts must be filed with Companies House and are publicly available.
Personal risk is limited to the share capital introduced to the company (unless personal guarantees are given for the company borrowings)
The profits are taxed under corporation tax and the directors are taxed as employees and on any dividends taken out of the business.
You must register your company with Companies House before starting trading. In the web there are many organisations that specialise in setting up companies.
Normally you have greater administrative costs as annual accounts must be filed with Companies House. Small companies with a turnover of less than £5.6m do not need to have their accounts audited.
Your customers perception is higher when you are trading under a limited company.
It is easier to reward your employees and family by issuing shares in your company.
Also as it can be seen on the following example, there can be tax savings to be made.
My favourite form of tax planning involves having both a sole trader or partnership and a Limited company, to enable the directors of the Limited company to run their motor cars through the self-employed entity and move enough profits to cover the sole trader or partners’ allowance. This also allows the directors to pay Class 2 National Insurance that counts towards their basic state pension, as well as incapacity, bereavement and maternity benefits. This requires professional advice as it is not suitable for every trade or profesion.
I hope the above has provided you with food for thought in how to structure your business either online or offline.
Hasta la vista …
Information contained in the above posting is intended to inform on current choices about business structure and it is not intended to be a statement of current law and practice, I accept no liability for any errors of fact contained herein and in particular I accept no liability for any loss caused by any person acting or otherwise upon such material. Please take full advice from an accountant if you are in any doubt whatsoever regarding your accounting or taxation matters.