Choosing the right business structure
When setting up a new business, choosing the most suitable company structure is an important undertaking. Each different format has implications for tax, ownership and responsibility. This brief guide will help you work with your clients to decide which route is best for them.
When deciding which structure would best suit your client's enterprise you'll want to consider:
- Cost of running the company
- Limitation of liability
- Tax benefits
- Number and nature of stakeholders
Most new business owners choose to set themselves up as either a sole trader or limited company. But what are the benefits and limitations of each and how can you advise clients which route to take?
Sole trader
Benefits |
Considerations |
| Easy to set up with little outlay. | You are personally liable for any debt if something goes wrong. |
| Any profit you make is your income. | You’ll find it more difficult to raise finance and may need to provide a personal guarantee. |
| You will need to file a tax return at the end of each year, but this is usually a relatively straightforward process for your accountant. | If your profits exceed £40,000 you may pay slightly less tax if you form a limited company. |
| Overall cheaper to administer than a limited company. | Class 2 & 4 National insurance payable on profits. |
Provide your clients with this useful sole trader tax guide as a takeaway from their consultation.
Limited company
Benefits |
Considerations |
| A limited company is a legal entity separate from its owners, which reduces your personal liability. | There is a small fee to register with Companies House. |
| You’ll usually pay yourself, and any other shareholders, dividends as income. Shares can be sold to raise capital. |
You’ll need to file your accounts with Companies House and HMRC, and as a director, you’ll need to complete a personal self-assessment tax return. |
| You can add shareholders or even transfer ownership without affecting the management of the company. |
Accounts and taxation are more complete and you'll need an accountant to help you complete and file them. |
Other options
The decision your client makes from the outset isn’t binding. They can start out as a sole trader and register as a limited company at a later date when turnover increases, for example.
Of course, these aren’t the only two options when it comes to setting up a new business. They could also consider:
- Partnership
If two or more people run a business together as partners, they share profits, losses and unlimited legal liability. It’s important to draw up a partnership agreement to make sure all parties understand their responsibilities and how profits/liabilities will be split. This requires specialist accountancy and legal support. - Limited Liability Partnership (LLP)
An LLP operates more like a limited company, in terms of the partnership being a separate legal entity with all partners having limited liability (which depends on the amount they have invested in the business). Accounts are required by Companies House but taxation follows the rules for partnerships ie, partners pay income tax and NI on their share of the profits. - Social Enterprise
If your client’s business will benefit the community, they could opt to set up a Social Enterprise. These can be profit making and can be structured in a number of ways, from a co-operative or charity to a limited company. You’ll find more about setting up a Social Enterprise here. - Employee ownership
With employee ownership, all employees have a ‘significant and meaningful stake’ in the business through holding shares (either personally or in trust) and having a say in how the business is run. Read more about setting up an employee owned business.