Sole trader, limited company, partnership, or LLP? Gulp. There’s a fair few ways to structure your business depending on how the decisions you make down the line will affect its growth.
In a nutshell, if you’re not planning on employing anyone except you then you’re likely best off as a sole trader, but that does mean that any business debt will be met from your personal wealth if the business fails. A partnership is great if you’re going into business with someone you know well and is common when sole traders wish to expand, but liability will affect all partners and can lead to messy ‘break ups’. Registering a limited company at Companies House gives your business instant credibility and makes it easier to separate your money from the company’s money, but you’ll need to be really on top of your admin. And, limited liability partnership (LLP) models are effectively a hybrid between limited companies and partnerships, which allows for flexibility, but does not give the same tax advantages.
This isn’t really a nutshell topic though, so we’ve delved a little deeper to help you work it all out.
As a sole trader, you and your business are pretty much one and the same from both a tax and legal perspective, which means you’re personally responsible for the business – and any debt it may rack up. The profits you make (sales minus costs) until April 5 of annually are declared on your tax return as your personal income for that year – even if that cash is not paid out as salary or paid into to your personal bank account.
It’s also worth getting clued on the Making Tax Digital (MTD) rules and regulations here, which businesses with a taxable turnover over the VAT threshold of £85,000 must follow by keeping digital records and using specific software to submit their VAT returns. Businesses with a taxable turnover below £85,000 should follow the rules for their first return on or after April 2022, and if you’re below the threshold you can join MTD now and select your compatible software here.
Some of the benefits of operating as a sole trader are:
- It’s simple to set up and easy to keep on top of admin. The extent of your obligations are: to be VAT-compliant, deduct and pay PAYE and National Insurance to HMRC if you have employees, and to file a self-assessment tax return; that’s it.
- Since your personal finances and the finances of the business are one and the same. it’s much easier to take money out a sole trader than a limited company, so you can take money out of the business as and when it’s needed.
- Information about limited companies has to be made public, whereas all the details about a sole trader’s business can be kept private, which secures your anonymity if you’re attempting to launch the business while you’re still employed and also reduces the costs associated with filing annual accounts.
- Should you need to call it a day and close the business, winding everything up as a sole trader is straightforward – providing you’re not left with debts that you can’t pay.
Always the most terrifying sounding for people that like to be in control, opting to become a limited company means your business is an entirely separate legal entity entirely and must be formed – or incorporated – and registered at Companies House.
You can allocate shares to any number of people you choose when the company is incorporated, and the business will be owned and therefore controlled by those who own its shares. It will also have to have certain standard legal documents that govern what it can do and what business it operates in.
Divvying out the shares and working out where equity is best placed can be a mind-bender and the running of a limited company always requires more complicated admin – filing accounts at Companies House, annual corporation tax return etc – which, in our humble opinion, is always best taken care of by an accountant with their finger firmly on the industry pulse.
Some of the benefits of operating as a limited company are:
- Greater tax efficiency due to the fact you’ll receive income in the form of both salary and dividends.
- Any business debts are separate from that of the owner(s), reducing risk if things go wrong.
- Since equity can be sold, limited companies are more flexible – and therefore have it a little easier – when it comes to raising investment and funding.
A partnership setup is pretty similar to that of a sole trader, but the key difference, as the name suggests, is that the business has more than one owner. Each partner owns a specific percentage of the profits (and the debt), so they must pay tax on that percentage, and each partner’s share of the profits is treated as their income.
Some of the benefits of running a partnership compared to a sole trader and a limited company are:
- Sharing the load – financially, operationally, and crucially when it comes to making tough decisions, which can be a lonely old place on your own. This is also why it’s particularly handy to go into business with people whose skills complement yours.
- The internal structure of conventional partnerships allows for flexibility because changes can be made to the legal rights and responsibilities of partners, as well as to their profit-sharing ratios.
- What cannot be stressed enough is the benefits of shared decision-making – if it’s done well; although having various brains to pick isn’t necessarily a bad problem to have, it can also present problems if people disagree strongly. Compromise is very helpful in personal relationships, but rarely done with as much grace in business.
Limited liability partnership (LLP)
LLPs share some of the same characteristics of standard partnerships – internal management, tax liability and the distribution of profits, for example, but they also provide the limited liability of an incorporated company.
Some of the benefits of limited liability partnerships are:
- LLPs are generally not taxed as corporations, so they do not need to pay corporation tax. Instead, each member is taxed through self-assessment as a self-employed individual, which means increased tax transparency.
- As with partnerships, the internal structure of an LLP allows for flexibility in terms of changes to the legal rights and responsibilities of partners, as well as to their profit-sharing ratios.
- It’s said that limited liability can leverage more trustworthiness and professionalism than a conventional partnership, which proves useful when trying to win high-value contracts.
- It’s easier to appoint new members. Unlike a limited company, there’s no share capital in an LLP, so new members can be appointed without having to issue new shares.
- An LLP does not have to register as an employer if the only people working for the company are members, which leads to significant national insurance savings.