One of the first major decisions to be made after deciding to chase the dream of starting your own business is selecting the right business structure. Yet, despite its importance, choosing a business structure that’s suited to your business’s needs and goals is a little-known and rarely discussed part of becoming a small business owner in the United Kingdom.

Try thinking of the business structure of your new venture as the foundation upon which your new business will be built. Much like the foundation of a building, it may not be the most exciting or appealing part of the process – but, if you don’t get it right, you will undoubtedly run into trouble in the future.

In the UK, the business structure you choose will determine how much tax you pay, how much control you have over the business, the amount of paperwork, and much more. While you can change the business structure as your operation grows and expands, it’s vital that you choose the right one to avoid headaches and unnecessary expenses.

So, whether you’re starting a new business, or even re-evaluating your business’s current structure, our guide will shed some light on the common business structures, and which one may be best suited to you.

What is a business structure?

The truth is, not all businesses are created equally.

A business structure is the legal framework within which your business will operate. Each one can drastically effect how your business is run and even how much money you take home at the end of the day. Your chosen business structure determines many things, including:

• the licenses you require,
• your tax liabilities and how much tax you pay,
• whether you’re considered an employee, or the owner of the business,
• potential personal liability (i.e., how at risk you are if things go pear-shaped), and
• the level of control you have over the business,
• ongoing costs and volume of paperwork for your business.

Every business structure is different and choosing the right one will depend on your business goals, your finances and your

Let’s quickly run through the most common business structures in the UK.

Business Structure Types – Pros and Cons

Sole Trader

This is the simplest form of business structure and most popular one in the UK. It’s the simplest and least expensive to set up initially. As a sole trader, you are personally responsible for the business.

This gives you complete freedom to make business decisions and take home the profits. However, the trade-off is sole traders personally bear the financial risk that comes with running a business. Also, despite what the name suggests, you can even employ people.

Pros:

• Sole traders have the fewest tax reporting requirements.
• Sole traders get to take home all the profit.
• You have the most control over business decisions.
• You are able to employ staff.

Cons:

• Sole traders tend to have what’s called ‘unlimited liability’ which means all your personal assets are at risk if things go wrong. In the eyes of the government – you are the business, so any debts or losses are your personal responsibility.
• You’re also not entitled to workers compensation if you get hurt at work.

Tax:

Sole Traders pay tax on their profits depending on how much money they make – rather than a flat rate. You must personally pay income tax on all profits at the following rate:

• 0% up to £12,500 pa
• 20% up to £37,500 pa
• 40% from £37,500 to £150,000 pa
• 45% above £150,000 pa

If you exceed the Value-Added Tax (VAT) threshold – currently £85,000 a year – you’ll also need to register for VAT.

Partnership

A partnership is exactly what it sounds like – a number of people running a business together. It’s very similar to a sole trader but there are two or more of you to share responsibility.

Pros:

• A partnership shares quite a few benefits with sole traders in terms of the tax reporting obligations and ease of set-up.
• You share all the profit with your business partner/s.
• You are able to employ staff.

Cons:

• Like a sole trader, you are personally responsible for losses or debts incurred by the business.
• A partnership tax return needs to be completed.

One key concern with a partnership is the potential for disputes over profit sharing, administrative control, day-to-day involvement, and business direction. Because of this, it is advised to have a lawyer prepare a formal agreement outlining:

• each partner’s role and level of authority,
• each partner’s financial contribution,
• a procedure for resolving disputes,

• a procedure for ending or resigning from the partnership, and

• the number of people or entities running a business together, but not as a company.

Tax:

Partnerships also pay tax on their profits depending on how much money they make. Your partnership must personally pay income tax on all profits at the following rate:

• 0% up to £12,500 pa
• 20% up to £37,500 pa
• 40% from £37,500 to £150,000 pa
• 45% above £150,000 pa

If you exceed the VAT threshold – currently £85,000 a year – you’ll also need to register for VAT.

Limited Company

A limited company is where we begin to create some separation between the business and the business owner. If you register a limited company, you become an employee of the company.

Pros:

• The company will be able to accrue its own debt, profit, and associated risk separately from the owners (called shareholders).
• Depending on your profit levels, a company’s flat business tax can result in less tax liabilities.

Cons:

• Companies have more significant set-up costs and administrative requirements.
• Companies are required to pay a 19% business tax on any profits from day one.
• Companies have more complicated taxation requirements.

How to register your business?

What you need to do to register and start your business will depend on what business structure you decide best suits you.

Visit the HMRC’s website on registered a business for information on registering as a sole trader, a partnership, or a limited company.

How to register as a sole trader?

You can begin the process of registering as a sole trader on the HMRC website. There, you can find all the information you need to take the next steps – including naming your company, registering for your self-assessment tax return, VAT and more.

 

After your business is up and running, avoid the pitfalls of accounting and bookkeeping by using simple, easy-to-use, accounting software Cashflow Manager. Start a 30-day free trial today.