Out of 5.7 million private sector businesses in the UK, 60% are sole traders, while 33% operate as companies and 7% as partnerships.
Choosing which of these structures will work for your new business is one of the first decisions you’ll need to make, and it’s not one to be taken lightly.
Your choice of trading entity will have lasting effects on the future of your business, so it’s better to start off with the right setup for your needs than rush into it, causing difficulties down the line.
It’s relatively simple to set up your business as a sole trader. You’ll be operating as a self-employed individual and can keep all your business’s profits after paying tax on them.
The downside of this is you’ll be personally responsible for any losses your business makes.
As a sole trader, you must:
- keep records of your business’s sales and expenses
- pay income tax and national insurance
- complete a self-assessment return each year.
As a limited company director, you’ll have reduced liability for losses your business makes, as your company’s finances are separate from your personal finances.
Directors are responsible for running the company, but shares in it can be owned by a number of people.
This is a common option for contractors, especially as some organisations will only agree to work with a limited company.
Directors of limited companies have additional responsibilities, including:
- keeping company records and reporting certain changes
- paying corporation tax
- providing statutory accounts
- sending Companies House a confirmation statement
- sending HMRC a company tax return
- keeping a record of ‘people with significant control’.
In a partnership, two or more individuals share the management and profits of the business. Each partner must complete separate self-assessment tax returns on their share of the profits.
This can be a good option if you’re starting a business with people you know well, and you want to share control of the business within that small group.
Much like sole traders, the individuals in partnerships are responsible for any business losses or debts.
Among other duties in a business partnership, you’ll need to:
- register with HMRC
- draw up a partnership agreement
- choose a nominated partner, who is responsible for managing partnership tax returns.
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These are just a few of many options you could consider when deciding on your business structure, and the one that will work best for you depends on your specific circumstances.
Expert advice is invaluable at this formative stage, and we’re more than happy to help get your new business up and running.