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Starting A Business: What Is The Best Structure For My Small Business?

Starting A BusinessStarting a business involves lots of difficult decisions. The best structure for your business is an important decision but a tricky one. Setting it up the right way keeps costs down. It can also help prevent working relationships turning sour, which is a major cause of business failure.  If there is just one of you, you have the choice between a sole trader and a limited company. If you are starting a business with others, you have the choice between a partnership, a limited company or a limited liability partnership.

There are advantages and disadvantages of each.

1. Starting A Business As A Sole Trader

  • Being a sole trader is very simple.  It’s easy to start and low cost to run. You file one form with HMRC to let them know that you’re in business. Then you file one tax return with them each year. If your business makes a loss in its first few years you can put it against your other current or past income and maybe get some money back.
  • In the eyes of the law, you are your business. This means that if you decide to empty your business bank account, HM Revenue won’t bat an eyelid!
  • National Insurance is low. This means that unless your earnings are high, total tax payments can be lower than if you formed a limited company.
  • You can form a limited company later and transfer the business to it. However, some tax may have to be paid on the transfer.

Disadvantages

  • As there’s no legal difference between you and your business, if your business is sued, you are sued and you could lose your home, your car and other personal possessions.
  • Your options for raising money are limited, and if you are a sole trader it’s harder to sell the business or pass it on.

2. Starting A Business As A Partnership

A partnership has similar advantages and disadvantages to a sole trader.  But there are two other factors to take into account.

Advantage

  • Raising money is easier than in a sole trader business, as this can be done by introducing new partners.

Disadvantage

  • Each partner is personally liable for the business debts of the partnership, even if another partner has caused them.

To avoid disputes, it is vital to have a comprehensive agreement signed by all partners.

3. Starting A Business As A Limited Company

The advantages of having a company tend to increase as your business grows.

Advantages

  • A limited company has more credibility. When you enter into an agreement with a supplier, they can check the credit rating of the company rather than you as an individual, unless you are a start-up who hasn’t yet filed any accounts.
  • Normally, the liability of the shareholders is limited to the amount you invest in the company when you bought the shares, unless you have given personal guarantees or security on company borrowings, or the company trades wrongfully or fraudulently.
  • It is easier to raise large sums of money for the business, or sell part of the business.
  • It can cost less in tax to run a limited company especially when your business’s profits are growing.  Higher earners can take advantage of keeping the money in the business or making pension payments.
  • Your business name is an important part of your business brand and you may want to register the company with that name before anyone else does, even if you decide to keep the limited company dormant at the beginning.

Disadvantages

  • A limited company is more complicated to set up and run. You have to tell both HM Revenue and Companies House that you’ve set up a company. Each year you need to file four documents: annual accounts, annual return, a tax return for the company and a tax return for yourself.  The accounts and annual return are on the public record and anyone can buy a copy of them from Companies House.

4. Starting A Business As A Limited Liability Partnership

A limited liability partnership is a corporate body with its own identity and capacity. It is a perfect solution for a partnership that seeks limited liability.

Advantages

  • Members can limit their liability for losses, although personal liability can arise in circumstances similar to those that applied to limited companies.
  • It has the flexibility of a partnership.

Dis-advantage

  • A limited liability is taxed as a partnership.  This means tax is charged on all the profits, whether or not they are distributed to members.
  • A limited liability partnership has to be registered with Companies House and requires similar paperwork to a limited company.

Conclusion

Getting Advice On Starting A BusinessThe best structure for your small business is not a clear cut decision and everyone’s situation is different.  If you are unsure, seek advice from your accountant who can advise you on what business structure would work best for your personal circumstances, or contact us. What were the best decisions that you made when you were starting a business? We would love to hear from you.

By FCA, Co-Founder of Accounts Resource.

Accounts Resource is a pro-active accountancy practice based in South West London. Accounts Resource are specialists in providing Accounting and Tax solutions to small and startup businesses and won The Best New Startup Award at the Richmond Business Awards 2012.

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