Choosing the right company structure for your business is a crucial decision that can significantly impact your tax liabilities, with different options coming with different implications.
Let’s wade through the choices:
Sole Trader
A sole trader is the simplest business structure, where you are personally responsible for all aspects of the business.
- Taxation: You pay income tax on your profits, which is calculated based on your personal tax allowances. National Insurance contributions are also applicable.
- Advantages: Simple setup, full control, and all profits belong to you.
- Disadvantages: Unlimited liability, meaning your personal assets are at risk.
Partnership
A partnership involves two or more people sharing the profits and losses of a business.
- Taxation: Each partner is taxed individually on their share of the profits. National Insurance contributions also apply.
- Advantages: Shared responsibilities, potential for pooling resources.
- Disadvantages: Unlimited liability for partners, potential disagreements between partners.
Limited Liability Partnership (LLP)
An LLP is a hybrid structure combining elements of partnerships and limited companies.
- Taxation: Similar to a partnership, partners are taxed individually on their share of profits. However, the LLP itself is a separate legal entity.
- Advantages: Limited liability for partners, flexibility in management structure.
- Disadvantages: More complex to set up and manage than a partnership.
Limited Company
A limited company is a separate legal entity with its own rights and liabilities.
- Taxation: The company pays corporation tax on its profits. Dividends paid to shareholders are taxed as income.
- Advantages: Limited liability, potential tax benefits, easier to raise finance.
- Disadvantages: More complex to set up and manage, additional administrative burdens.
Need another list? Here’s the key tax considerations
- Income Tax: Applies to sole traders and partners, based on personal income levels.
- Corporation Tax: Applies to limited companies, based on the company’s profits.
- Dividend Tax: Applies to shareholders of limited companies, based on their personal income levels.
- National Insurance Contributions: Apply to sole traders and partners based on their earnings.
- Value Added Tax (VAT): Applies to businesses exceeding a certain turnover threshold.
The best company structure depends on various factors, including:
- Number of owners: If you are the sole owner, a sole trader might be suitable. If you have partners, a partnership or LLP could be considered.
- Liability: If you want to protect your personal assets, a limited company or LLP might be preferable.
- Tax implications: Consider the tax rates and allowances applicable to each structure.
- Administrative burden: Limited companies and LLPs generally require more paperwork than sole traders or partnerships.
- Financing: Some structures may be better suited for raising finance than others.
Chat to us about what works for you, both in the immediate and the long term
