Thank you to Neil Jaggar for our guest blog, where he explains the different types of business set ups.
You have your brilliant business idea; you’ve written your business plan and cash flow forecast and you’ve done your market research… now it’s time to decide which business structure is right for you. There are several different business structures available in the UK. Here is a summary of each of them:
Sole Trader: A sole trader is considered to be ‘self-employed’. This means you must register with HM Revenue & Customs (HMRC) for self-assessment as soon as you start trading.
A sole trader is responsible for running their business and for meeting the legal requirements that come with it. As a sole trader, you can keep your profits after tax; however, you are also personally responsible for any debts of your business.
If you are a sole trader, you can employ staff and you need to pay income tax and National Insurance for profit generated. You can submit your tax return online or through a paper application.
Partnership: A partnership is between two or more individuals who personally share responsibility for a business. This includes sharing the business profits, bills and debts. Each partner pays tax on their share.
A partner doesn’t have to be an actual person. For example, a Limited Company counts as a ‘legal person’ and can also be a partner.
To set up a business partnership you need to choose a company name and decided who will be the ‘nominated partner’. The ‘nominated partner’ is responsible for managing the partnership’s tax returns and record keeping. You then register your partnership with the HMRC.
A partnership agreement document is needed to outline the liabilities, ownership, how profits of the business are split and, also, what happens if one partner wants to leave.
Each partner must register as self-employed and submit a separate tax return.
Though there is more potential to raise finance in a partnership, its full liability affects all partners.
Private Limited Company (Ltd): A private limited company is a business owned by shareholders and run by directors. In small companies, these could be the same people. As a limited company, you are required to register at Companies House with information on directors, shareholders, and financial accounts – all of which are available to the public.
The benefits of becoming a private limited company include reduced risks as any debts remain separate from the owners, and the liability of shareholders is limited to the price paid for their shares. This means that personal circumstances aren’t affected if the business fails and personal investments are safe (as long as there hasn’t been any unlawful trading).
To set up a private limited company you must appoint at least one director (who pays National Insurance contributions and income tax on salary); you must have a registered office in the UK (this can be your home address but check that you declare it on your buildings and contents insurance); you must issue at least one share when you set up the company (make sure you have a shareholder agreement in place) and, finally, the company name must be available.
Public Limited Company (PLC): Like a private limited company, A PLC is owned by its shareholder(s) and run by its directors – each benefiting from limited liability.
However, a PLC’s shares can be traded in public. The main reason behind the choice to become a public limited company is the ability to raise funds from the public and for shares to be freely traded.
Most PLCs are not formed as such but converted from existing private limited companies via a special resolution – normally when they grow to the point where public investment is necessary to drive the business forward.
A public limited company must be formed with at least two directors and a minimum of £50,000 worth of shares.
Limited Liability Partnership (LLP): Solicitors and accountants often use this business structure which is similar to a traditional Partnership but has the benefit of limited financial and tax liability. They are not liable for corporation tax and only pay tax on their personal income.
A LLP has a minimum of two partners (rather than directors) appointed as ‘designated’ members. They are responsible for the day to do running of the business and are also responsible for the filing of annual accounts at Companies House and HMRC. Members are only liable for the amount of money they invest, plus any personal guarantees.
Partners are required to provide a registered address for the business and maintain a register of members.
Guarantee Company (None Profit): A guarantee company is basically a not-for-profit, social enterprise or charitable company. All profit made by the company is re-used for the good of the business.
It is a separate legal entity from its owners, and therefore is responsible for its own debts. The guarantors have protection over their own personal finances and are responsible only for paying company debts up to the amount guaranteed which is usually only £1.
A helpful website is, https://www.gov.uk/limited-company-formation
If you would like to find out more about obtaining professional support for your business, contact Neil today at firstname.lastname@example.org