There are several types of business set up but let’s concentrate on the main two types:
- Limited Company
- Sole Trader (partnership if more than one person)
Deciding between these two types of business structure is one of the most frequently asked questions of a new start up.
Only you can decide what structure best suits your needs as it is not a ‘one size fits all’ answer.
To help here is a brief summary of some of the important differences:
What does the structure mean?
A limited liability company means that your personal assets are protected if the business fails, unless of course you have given personal guarantees against any debts. The debts are limited to the company and not you as a shareholder.
With a sole trader business you are personally responsible for the debts of the business and your other assets e.g. your house could be used to settle the debts of the business.
There is a perceived status of importance attached to a limited company. In fact some businesses will only trade with limited liability companies. So it is important to establish your market before you make a decision on your business structure.
Regulation and legislation
Regulation, legislation and control surrounding limited company status e.g. Companies Acts, filing accounts, registering the company etc can be more onerous than that of a sole trader business.
A sole trader is easier to operate with less formality.
It is likely that for a limited company you would need an accountant to complete accounts, tax etc but as a sole trader you may be able to complete your self assessment tax return yourself.
There can be some tax savings associated with operating as a limited company although, as a rule of thumb, this applies to profits in excess of about £30,000.
Profits from the limited company can be taken in the form of dividends and no national insurance is due on the dividends although the dividend tax now places a higher tax burden on those in receipt of profits extracted in this way.
For a sole trader income tax and Class 2 national insurance will be due. Class 4 national insurance applies to profits over a certain level.
The savings depend upon your level of profit of course.
Accounts and Reporting Requirements
For a sole trader the accounts and reporting requirements are very straight forward. A set of accounts and a self assessment self employment supplement need to be completed each year.
As a limited company you will have a number of filing duties. Missing a filing deadline can result in fines and penalties.
Your filing duties are as follows:
- Annual Statutory Accounts
- Confirmation Statement
- CT 600
- Full P&L for HMRC
- Self assessment for directors
In both cases you may have to file vat returns if you are vat registered and Real Time Information (RTI) returns if you have employees.
How to decide
Only you can decide which structure will suit your circumstances best. However this may be something you would like to discuss with your accountant or business advisor at the start.
Other business structures available are for example limited liability partnership, LLP, Community Interest Company, CIC etc.
As these are less used structures we do not cover them here but suggest you seek specialist advice if you are thinking of entering into one of these structures.