Choosing the legal structure of your new business venture is an important decision.

The structure chosen can determine how much tax is paid, the amount of paperwork required, personal liability and your ability to raise capital.

There are a number of options to choose, and remember what works for one business venture may not work for another. Choose a structure that best suits your business needs in the initial stages.

OPTION 1 - Sole trader

This is the simplest business structure where an individual owns and runs the enterprise. A sole trader will retain control of the business decisions and profit but is personally responsible for the company’s liabilities.


See also: How to set-up as a sole trader



Pros Cons
Simple to set up You are responsible for the company’s liabilities
No dues or fees to registerRaising finance can be difficult as some banks and financing sources may be reluctant to provide business loans
Little regulation and financial reporting Taxation may become costly if profit increases
Ability to retain control of business decisions and profitSome organisations will not work with sole traders

As you will be classed as self-employed, profit will be taxed as income by HMRC and it’s important to bear in mind the taxation thresholds. Unlike the name suggests, you are able to employ staff but you must adhere to the rules and regulations of employing someone as a sole trader.

This option may be right for you if:

- You intend to work alone

- You want to start your business venture without large capital investment

- Profit is not expected to reach the greater taxation thresholds

OPTION 2 - Partnership

This structure is a common extension of the sole trader model that allows two or more people to co-own and run a business venture. It allows people to pool their assets and skills while sharing the management and profit.


See also: How to set-up a business partnership


Like a sole trader, a partnership is not a separate business entity and therefore the partners are personally liable for all debts and obligations. Each partner must be registered as self-employed and be responsible for submitting their own annual tax return.

With a partnership, it is also recommended to draw up legal agreements at the very beginning that detail duties and responsibilities to avoid any potential problems.

ProsCons
Opportunity for greater capital investmentPartners are personally responsible for the company’s liabilities
Shared responsibilities and cost of start-upRisk of relationships breaking down - a friendship may not survive a partnership
Complementary skills and additional contactsShared profit
Another person to share ‘thrills and spills’ withIndividuals do not have total control of the business

This option may be right for you if:

- You have a good business partner to go into business with

- You are comfortable with sharing the profit

- You want to pool assets and skills

OPTION 3 – Private limited company (Ltd)

Unlike sole traders and partnerships, a private limited company is a legal entity in its own right. This means that the liability of the shareholders is limited to their investment and any unpaid shares they own. They are not personally liable, the company has its own liabilities, profit and debt.


See also: How to set-up a private limited company


There are requirements involved in forming a private limited company:

  • There must be at least one director over the age of 16 appointed
  • The company must be registered with Companies House and have their own legal rights and obligations
  • The company must have a registered office in the UK
  • The company name must comply with Government regulations
ProsCons
Less personal financial exposureHeavily regulated with extensive record keeping required
Potentially favourable tax regimeMore administration in setting up and running the business which usually incurs additional cost
Lends credibility to the businessAnnual accounts and financial reports must be placed in the public domain
Any profit made after paying tax can be kept within the business

This option may be right for you if:

- You what to protect your personal finances

- If you want a more professional image for your business

- If you want to take advantage of the tax regime available to limited companies

There are several other types of business structure you could consider, but these are the most popular options when starting a new business venture. It is possible to change the business structure in the future but there are implications when doing so. For more advice speak to your accountant or a business adviser to discuss the best option for you and your business.

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