You’ve finally summoned the bravery to bid your boss farewell and are now on your own. You didn’t think this was going to be easy, did you?
Many people who have made the same decision understand that this is only the beginning.
This is the moment to make several decisions. You can rest assured that each step will be simpler once your organization is established.
When beginning a business or becoming self-employedfor the first time, one of the most important decisions is what type of business structure to choose.
There are other solutions, each of which has advantages and disadvantages in terms of legal and taxation – but your four main choices are as follows:
- Limited liability partnership (LLP) Limited company Sole trader Partnership
AABRS director Simon Renshaw discusses what you need to know about each.
As a lone trader, you’re on your own.
From a tax and legal standpoint, you and your businesses are virtually the same if you go the sole trader path.
This implies you are personally liable for the company and any obligations it may incur.
Even if it is not paid out as salary or deposited into your bank account, the earnings you make until April 5 of each year are disclosed on your tax return and classified as personal income.
Simply be aware of the changes brought about by Making Tax Digital. MTD requirements apply to businesses with taxable revenue exceeding the VAT threshold (£85,000). This entails keeping digital records and submitting your VAT returns using particular software. For their first return on or after April 2022, businesses with a taxable turnover of less than £85,000 will be expected to follow the requirements. You can voluntarily join MTD now if you are below the threshold.
Self-employed firms and landlords having yearly company or property revenue of more than £10,000 will be required to implement MTD income tax standards beginning on or after April 6, 2023.
There are several advantages to working as a sole trader. Among them are:
- Setup and management are simple. One of the most appealing aspects of being a single trader is how simple it is to set up and run a business. If you have staff, you must deduct and pay PAYE and National Insurance to HMRC and file a self-assessment tax return, but that is the extent of your responsibilities.
- There are fewer financial constraints. A lone trader can take money out far more easily than a limited business. You can take money out of the company whenever you need it. This is because your personal and business funds are the same.
- There is more privacy. Certain details concerning limited liability firms must be made public. Being a sole trader is a unique experience. All company information can be kept confidential. This gives you more privacy (for example, if you’re running a business in your spare time while working) and lowers the costs of completing annual reports.
- It is less difficult to close the business. Closing a limited corporation involves time and money, especially if there are debts. It is quite easy to dissolve a single trader, yet it can be difficult if you have debts that you cannot repay.
“I started my business as a lone trader in 2007.” “At the time, it was the simplest option and required very little effort to set up,” said Graeme Thomas, owner of Johnny F Designs. “I just called HMRC and informed them I wanted to start trading as a single trader under Johnny F Designs, and that was it.”
To tango, two people are required.
A partnership is comparable to a sole trader, but it varies in that it has more than one owner.
Because each partner owns a certain amount of the profits and liabilities, they must pay taxes on that portion.
Each partner’s share of the profits is considered their income, just like a single trader.
When compared to a sole trader or a limited business, there are several advantages to running a partnership:
- Responsibilities are shared. The financial and operational responsibilities for running the business can be shared by having several business owners. Individual workloads can be lowered by assigning tasks based on skill sets.
- LLPs are more difficult to form than traditional partnerships. Changes to partners’ legal rights and obligations and their profit-sharing ratios can be made to the internal structure.
- Decision-making. Partners share decision-making, which can be advantageous because there are more minds to choose from. It can, however, be problematic if not everyone agrees.
Limited-liability corporation (LLP)
This structure has some of the same features as a traditional partnership, such as internal management, tax liability, and profit distribution. Still, it also has the limited liability of an established company.
Professional services firms, such as solicitors and architects, frequently use limited liability partnerships. Among the advantages are:
- Transparency in taxation. Because LLPs are not taxed as corporations, they are exempt from paying corporation tax. Instead, each member is taxed as a self-employed individual through self-assessment.
- An LLP’s internal structure is equally adaptable as a traditional partnership, allowing for adjustments to rights and obligations.
- Professional reputation. Over and above a traditional partnership, limited liability can improve a company’s professional standing. When seeking to win high-value contracts, this can be useful.
- Adding new members is simple. An LLP, unlike a limited liability company, does not have any share capital. This means that new members can be appointed without requiring new shares to be issued.
- Savings on national insurance. If an LLP’s sole employees are other members, it is not required to register as an employer. This can result in huge savings on national insurance.
- Decisions are easier to make. In contrast to LTDs, there are no requirements for people participating in LLPs to make decisions by resolution or hold board or general meetings.
Limited Liability Corporation (LTD)
On the other hand, a limited company becomes a completely different legal entity. This necessitates the formation of the company, or incorporation, and its registration with Companies House.
It will also need to have a set of standard legal documents that govern what it can do and how it does business.
When the company is formed, you can assign shares to any number of persons.
You can keep all of your shares, give part to your spouse, or sell them (‘equity’) to raise money.
However, more administration is required, such as filing annual accounts with Companies House and filing an annual corporation tax return, although these can be handled easily and swiftly by an accountant.
Having a limited business has several advantages, including:
- Due to the capacity to earn income in both salary and dividends, tax efficiency is increased.
- Reduced risk – the business’s liabilities (debts) are separate from those of the owner(s), lowering the risk if something goes wrong.
- They tend to project a more professional image of the company.
- Limited firms are easier and more flexible when raising investment and capital because shares can be sold.
“The company was set up as a limited company. If the business went bankrupt, it wouldn’t affect my status,” Brian Lonsdale, managing director of Smarter Digital Marketing, explained. “I also chose this option since it permitted me to hire another director and split up the company’s shares.” It leaves room for future expansion and growth.”
So, now is the moment to figure out what’s holding you back and why. You must be seriously considering this if you’ve already thought about it and spent five minutes reading this essay.
Simply consider your options, do the math, and jump on the ‘entrepreneurship’ bandwagon.
WXY is a social media and experiential PR agency based in Manchester, formed by Gemma Wieczorek and Marc A Young (pictured). The two chose to form a limited company over other choices when they started their business in 2018.
Gemma: When it comes to starting a business, there are many options to consider, and there is no one-size-fits-all approach. Marc and I don’t have a financial background, so talk about money revolves around clients.
We discovered that working with an accounting company allowed us to begin discussing how we wanted to be paid and our tax liabilities.
When you first start a business, all you want to do is get started. Setting up a limited business, on the other hand, allowed us to take a step back and figure out the foundations. When we see it in black and white on Companies House, there’s an aspect of ‘it feels more real,’ not to mention some significant financial benefits.
I would advise anyone starting a business to hire a good accountant to help them through the process of forming a limited liability company.
Marc: Before starting WXY, Gemma and I worked at an independent agency together. For us, becoming a limited company provided respectability to our business endeavor.
More paperwork may sound like a pain, but it has motivated me to make sure everything is up to date since it feeds into my urge to be organized, which is crucial.
A side project allowed us to collaborate on something that wasn’t part of our existing working relationship. It also enabled us to have open and honest conversations about money, forecasts, and selecting preferred vendors.