Picking the right company structure for your UK business

Sole trader

This is the simplest business structure. There is little in the way of red tape and expenses when setting yourself up as a sole trader. You must register for Self Assessment at HM Revenue & Customs (HMRC), pay income tax and Class 4 National Insurance contributions (NICs).

There are, however, a few downsides to practising as sole trader; one of the biggest is that there is no legal differentiation between you and your business.

When you are unable to pay debts of your own or the business, creditors may use both your personal and business assets in settlement.

While a sole trader might be great for an individual who wants to be his own boss and doesn’t need any financing, there are a few more things to consider as the profitability of your business increases.

Partnerships

A partnership occurs where two or more parties set up a business with a view to making a profit. There are two types of partnerships available to those who wish to start a business with another: The basic partnership and the Limited Liability Partnership (LLP).

Basic partnerships

In this business structure, partners may have an informal, unwritten agreement defining their responsibilities within the business. Partners share the profits, liabilities and business responsibilities equally, unless otherwise agreed. Each partner must:

• Send personal tax returns to HMRC
• Pay income tax on their share of the profits
• Pay their own NICs

There has to be one nominated partner who is responsible for registering the partnership with HMRC. To do this they must register themselves and the business for Self Assessment. This partner will also keep the company’s business records and manage the tax affairs.

As with sole traders, there is no legal differentiation between the business and the partners. Each partner is personally responsible for his own debts as well as those of the business. Both business and personal creditors may use business assets or those of either of the partners to settle any debts.

Limited Liability Partnership

Commonly known as an LLP, this entity has separate legal personality from the partners. This limited liability means that the partnership is liable to creditors and third parties, but not the partners.

This separate legal personality requires that the partners have an incorporation document containing:

• A declaration of compliance between the parties
• The name of the LLP
• The address of the registered office
• The name of incorporators
• The names of the various members

Members invest capital in the business and are remunerated a pro rata share of profits based on this initial contribution. They are only liable to the extent of their initial investment and their personal assets generally cannot be used to settle the debts of the business or other partners.

The reporting requirements for an LLP are more stringent than those of a basic partnership. LLPs must submit annual returns, appoint auditors, prepare and file accounts, and comply with accounting standards.

Private limited company

The two main attractions for setting up a limited company are the limited liability and the tax efficiency of the structure.

The company has a separate legal personality, protecting incorporator, shareholders and directors personal assets from creditor’s claims.

These companies only pay Corporation Tax on their profits at a rate of 19%; usually amounting to much less than the personal tax where turnover exceeds £150,000.

However, shareholders and incorporators must fulfil many more requirements when incorporating a company than with any of the other types of business.

The business must be incorporated with at least one director and one shareholder, and must be registered with Companies House. Registration is usually done online and must identify one director and one shareholder, as well as containing:

• The name and registered address
• The memorandum of association
• The articles of association
• A statement of capital

The reporting requirements for a limited company are also much more stringent than for other business types. Full accounting and financial records must be kept throughout the year as this information is necessary to complete the company’s Annual Financial Statements and Corporation Tax return.

In addition to this, details of the directors, shareholders and company secretary (if appointed) shareholders’ resolutions, indemnities, debentures and share transactions must all be kept by the company.

Compare your options

  Advantages Disadvantages

	Advantages	Disadvantages
Sole trader	Less red tape	No limited liability
	Inexpensive	Personal tax is higher than Corporation tax
	Few legal requirements
	Be your own boss
Basic partnership	Easy to set up	No limited liability
	Share liabilities with other partners	One partner's assets can be used to settle the personal debts of another
	Can adjust the terms of the partnership	Pay tax at the personal rate
Limited liability partnership	Limited liability	More set-up requirements
	Personal assets are protected from other partner's creditors	Taxed at personal tax rate
	Share in profits in proportion to investment	More stringent reporting standards
Limited liability company	Limited liability	Fees to register with Companies House
	Pay Corporation Tax on profits	Heavy administrative demands
	Tax efficient ways to distribute profits	Higher financial reporting standards

We can help you choose the right business structure to suit your needs. We can also set up your limited company and take care of all of your accounting needs.

Give us a call on +44 (0) 20 7759 7553 or send us an email at accounting@sableinternational.com and one of our consultants will get back to you.