You have made the decision to work for yourself, so the next major step will be to decide what form of legal entity will your new venture take by choosing your business structure? This can have a significant impact on the way you and your assets are protected and the way you are affected by taxation. For help with staying on their right side of the law when starting a business, check out our tips here.
There are pros and cons whichever status you decide on so let's have a quick overview to help you make the right decision about which business structure will work best for you.
Starting up as a sole trader (also known as self employed) is by far the simplest way of starting up in business. This should be done via the HMRC website, here, https://www.gov.uk/set-up-sole-trader. You can find out if you need to register with HMRC if you're a part time business here.
This is the easiest form of business to own and operate. There are no set up fees and there is no requirement by law to have annual accounts. However, for your own benefit in controlling the business and completing the year end tax return you will need to have adequate record keeping in place.
Sole traders do not have limited liability, any business debts you incur will be counted as personal debts and therefore your assets are at risk.
For tax purposes, the profit (or loss) of the sole trader is combined with any other income you may have. For example, if you continue in employment, you may exceed a higher tax threshold or even be entitled to a tax refund under these circumstances.
You will pay Class 2 National Insurance at the prevailing rate irrelevant of profit and Class 4 depending on the level of profit generated.
You will also be taxed on the whole profit of the business, after personal allowances have been taken into consideration, even if you do not draw down any income.
A partnership consists of two or more individuals running the business. It is wise to seek advice and form a deed of partnership prior to commencing trading. The partnership agreement should cover how the business will be run, responsibilities, how the profits will be apportioned and what happens in the case of dispute.
You will need to set up the partnership with the HMRC and all partners must register as self employed with the HMRC, here https://www.gov.uk/set-up-business-partnership/setting-up
Exactly the same as a sole trader, partnerships do not have limited liability and any liabilities are shared between the partners.
Limited Liability Partnership
A Limited Liability Partnership (LLP) is a business structure which has 2 or more members with Companies House.
Each member pays tax on their share of the profits as in an ordinary business partnership, however, there is no personal liability for any debts the business cannot pay (but personal guarantees for finance may be in place).
You must have a physical address, this can be your home address but be aware this is in the public domain through the Companies House website.
Register your partnership yourself or through an agent, you will receive a Certificate of Incorporation once the LLP is registered.
Ensure you have a LLP agreement in place, this will set out how the business will be run, including profit shares, members’ responsibility and how members will join or leave the LLP. We suggest legal advice is sought for this process. Designated members may be prosecuted if they do not meet their legal obligations.
For more information, you can also check out the government website, here https://www.gov.uk/set-up-and-run-limited-liability-partnership/overview
A Limited Company is responsible in its own right for everything it does and its finances are separate to your personal finances.
Any profit made is owned by the company, after it pays Corporation Tax. The company can then share its profits amongst shareholders. Directors are responsible for running the company.
As a director there are responsibilities that you must undertake, including:
- Following company's rules shown in its articles of association
- Make decisions for the benefit of the company, not yourself
- Declare conflict of interest if you may personally benefit from transactions the company makes
- Report changes to Companies House and HMRC
- Ensure the company's accounts are a true a fair view of the finances of the business
- File accounts with Companies House and the Company Tax Return with HMRC
- Ensure Corporation Tax is paid
Register for self-assessment and a post personal tax return every year (unless it’s a non-profit making organisation i.e. charity) and you receive no pay or benefits
You can of course engage other people to undertake this for you, i.e. an accountant. However, be aware you are still legally responsible for all of the above.
There are no strict rules to determine the business structure you choose. We would always recommend speaking to a professional to help you make the right decision for you! The above is just a guide to get you started in the thought process.