What structure is best for my business?

What structure is best for my business?


(techno sounds) – You’re one of the 600,000 new businesses that start up in the UK each year. The most common question
of a new business owner is what structure should
I use for that business? There are loads of options out there, but there are three main ones. The first option is the simplest option, and that’s to be a sole trader. If you do this, you’re the business and
the business is you. There’s nothing special
you need to do to start. You just go for it. All you do need to do is let HMRC know that you started your trading. Now, the a way a sole trader works is that you are the business, you sell your services or your goods. You pay your suppliers. Whatever is left at the end is yours. There’ll be some tax to pay on that, but it’s all yours. Second option is a partnership. A partnership is a sole trader involving more than one person. It could be two people. It could be 200 people, but it works exactly the
same as a sole trader. It’s simple and easy
to get up and running. Again, you just register with HMRC to let them know that you’re doing it. And then again, you and your
partners are the business. You sell your services or goods, you pay your suppliers. And again, what’s left at the end, the profit is split between the partners and you pay your tax on that. The third option is slightly more complex, and that’s a limited company. Now in this instance, the limited company is actually a separate
legal entity to you. The business is run through
the limited company, not through you. You own shares in the company, and also you’re usually a
director of the company, so you run it, but it
exists separately to you. The limited company sells
the goods and services to your customers, and the limited company pays the suppliers and at
the end the limited company makes a profit. After that company’s paid its taxes, it can then transfer what’s left to you, either as a salary or as a
dividend to the shareholders. For many business owners, the
choice of business structure comes down to the tax savings available. Traditionally a limited
company and its owners paid a lot less tax than a sole trader on the same amount of profits. And that’s because the
owner of a limited company doesn’t usually pay
any national insurance. However the rules have
changed back in April 2016, which did narrow that gap. There are still tax savings,
but they’re not as big. And your profits need to be quite large before the savings outweigh the costs. Having said that, as an
owner of a limited company, you have more flexibility about the timing that you take your
money out of the company through dividends and salary. And that does give you
a lot more opportunity for tax planning, which
ultimately reduces your tax bill. So aside from the tax
savings, what are the other differences between the structures? Let’s make it slightly
simple, I’ll just concentrate on a sole trader and a limited company, because the partnership is really just a type of sole trader. Now the first difference
is of the set up costs. Every business has set up costs,
common costs to either business structure, whether that’s your website,
setting up an office or a premises. But in terms of accounts and taxation, the difference in set up costs
is that with the sole trader you just set up and go. You need to register with
HRMC to let them know that you’re doing it, but aside from that there’s nothing else. However, with a limited
company, because it’s a separate legal entity, there are some set up costs. And as well as doing that, you
need to register the company with Company’s House and
pay them a small admin fee to do that. You then need to register the
company for taxation as well. And that could be
corporation tax and VAT and PAYE if you’re having employees. Therefore there is more time in set up and potentially extra costs
because it often makes sense to get someone to do that for you. The next thing that ties into
that is the administration of actually running the
different structures as you go forward. The sole trader, the only
accounts and taxation admin is that the owner, i.e.
you, each year needs to do a personal tax return. The personal tax return
year runs every year from the 6th of April
to the 5th of April and then you get nearly 10
months until the following 31st of January to do a tax return showing the sales, the expenses,
and therefore the profits, which gives the tax
you need to pay to HMRC by that following 31st of January. If you have a limited company though, as the owner of that limited company, you do need to do a personal tax return, but on top of that the limited company needs to do its own set of accounts. And those accounts go to Companies House, the government body that
looks after companies, and also to HMRC. The company also sends to HMRC
its corporation tax return that again summarises
its sales, its expenses, its profits, and its tax bill. In addition a limited
company also has to file each year a confirmation statement. This is a relatively simple form that goes to Companies House confirming
the name and address of the company, the name and
address of the shareholders, and you have to pay an
admin fee of £13 to do that. It’s a simple form, it’s quite cheap, but it’s one that Companies House takes very, very seriously. If you don’t do it, they
close your company down. One of the biggest differences
between structures, and for a lot of business owners a big driver in their decision, is the limitation of liability. And this is what happens
if something goes wrong. Now we don’t necessarily
want to think about this as we set up a business because
it’s all happy and exciting, but you do just have to think
about what could go wrong. And this could involve owing people money that you can’t pay – whether
that’s your suppliers or a loan – or it could involve
if you mess something up in delivering a service or goods and somebody makes a claim against you. Now ordinarily you would
try to have insurances against a lot of these
things, but what happens if you’re not insured,
or if it’s over a debt? Now if you’re a sole
trader, you are the business and the business is you. So if somebody comes after you for money, they aren’t just coming
after the business, they’re coming after you, which means that all of your
personal assets are at risk. Whether that’s your house,
car, or anything else you own. Whereas with a limited company, somebody can only come after
the assets of the company. You are separate. Your house, your car, all the
other stuff you own, is safe. All that’s at risk from you is anything you’ve put into the company
and anything the company owns. So that can be a huge
decider if you’re working in a sector where what you
do is a little bit risky – that limitation of liability
takes some of the risk away and can be a huge thing and a huge factor in your decision over the structure. The next difference is credibility. Now this is a funny one
because it’s not correct. But, when enough people believe
it, it becomes correct. A lot of people just feel
that a limited company looks more credible than a sole trader to customers, to suppliers,
to the outside world. Now it doesn’t actually
make any difference, but if people start to
believe it, it kind of does. And I’ve got a lot of
clients who ultimately have actually picked a limited
company because of that. Because of who they’re doing business with and having “limited” after the name just makes them look better. The next difference is pensions. If you have a limited
company, there are just a lot more options for your pensions. Now I’m not a pensions
expert, and I don’t want to be a pensions expert. It’s worth speaking to an
independent pension advisor about that, but just be
aware there are differences. Going back to tax, one specific thing, particularly in year one, is the treatment of any losses you might
make in a new business. Now a new business often does
have a lot of set up costs, particularly if you have premises. And that means you might make a small loss in the first year. If you’re a sole trader,
one of the advantages is that you can set that loss
off against any income you made from, say, your
job before you started the business, and you can
actually get a tax rebate. Whereas in the limited
company, you can’t do that. It’s back to that thing
where the limited company is its own separate legal entity. Its losses could only be
used by the limited company. And what happens then
is that any loss is used against the profits the following year. Now there is a short term
difference only in year one, but it’s worth thinking about. The last of the differences
I just want to touch on is the exit. What happens when you want
to close the business, or particularly if you
want to sell the business? It can be easier to
sell a limited company. And that’s because it is its own entity, it’s something that can be ring fenced, you can see what you’re selling. The buyer can see exactly
what they’re buying. If you’re a sole trader, it can just be a little bit more difficult. The last of the differences –
what happens when you actually want to finish the business. You might just want to close it down, you might want to sell it. It’s easier to sell a limited company, and that’s because it’s
its own separate entity. It can be ring fenced, you know exactly what you’re selling, and the buyer knows exactly what they’re buying. If you’re a sole trader,
it’s slightly more difficult. You can still do it,
but it’s just that thing of actually what exactly are you selling, what is the business, where
does it intend a new start. There are also, again, just
different tax treatments off the exits on the different structures. So those are the main differences. I hope that’s useful. The key thing is though that
actually which structure you choose does depend
on your circumstances and your business. And therefore it’s well
worth getting proper advice before you choose. So if you’d like any advice,
please do get in touch. I’d love to hear from you. (techno sounds)

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