Posted by Simon Misiewicz on 5th April 2013
Are you looking to start a business?
Would you like to know what structure is most suitable for you?
So you have decided to set up a business and are keen to get your venture up and running.
What business structure should you set up?
There are a variety of different structures to choose from and you need to consider which one will suit your new business best. Do you want to “go it alone” in business or would you rather work and run a company with other people?
The choice you make will affect the way your business can raise finance, the accounts you have to keep and also the tax that you pay. So as you can see it is an important decision to make.
So, what are the options and what are the key differences between them?
A sole trader business is simple to set up. All you need to do is to contact HMRC if you’re viewing this and want to start a business in the UK. You need to let them know that you wish to set up a business.
You will need to keep a record of your sales and expenses and complete an online tax return after the financial year end. Any profits go to you.
Benefits: It is easy to set up, you make all the decisions and you only need to complete one set of documents each year.
Downsides: You are responsible for any debts that your business runs up and legal issues. If you cannot afford to pay then you may put your personal assets, such as your home, at risk. If you have a business which needs a great deal of investment, this may be a risky option and it may not be as tax efficient as other types of business set up once you start to reach a turnover of £50k and above per year.
You may be considering working with others to help with the responsibility of running the business. In which case a partnership is a way for two or more people to own and run a business together.
If this is the road you want to go down then all the business owners need to form and sign up to an agreement covering issues such as:
• How much money each person will invest, the ownership ratio of the business and the roles and responsibilities of each person.
• You will also need to register each person with the HMRC to inform them that a partnership agreement is being formed.
If a partnership gets into debt then the partners are all responsible for paying it off.
Benefits: The company will benefit from a greater level of expertise – partners in the business can bounce ideas off one another. Additionally you can all share the risks and benefits of running a business.
Downsides: Disputes of power and decision making could arise between the partners. Having more people to make decisions can delay progress. Each person has to register with HMRC plus a partnership set of accounts needs to be submitted each year also to HMRC.
A limited company’s finances are separate from the personal finances of their owners and you become a shareholder of that business.
This means that any revenues, assets, debts and risks will not affect the individual business owner’s personal assets (for example their home) in the event of the business closing down. Finances such as wages and dividends are paid to the directors and they are responsible for the payments of tax.
Benefits: If someone sues you, they can only take what is in the business and nothing from you personally.
Downsides: There is a significant amount of administration involved each year.
If you have any hesitations about which structure would be best suited to your business then it is highly recommended that you seek professional guidance and support from an accountant.
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