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Choosing the Right Legal Structure for Your Start-up Business

finger selecting icon Choosing the Right Legal Structure for Your Start-up Business

Deciding the best legal entity for your business requires consideration. For newcomers, there’s a lot of new language and terminology to learn.

The business legal structure that you choose effects how the business operates. It also means that other obligations, such as the amount of tax you pay, can change. HMRC will ask you to confirm the business structure when you register with them, so it’s important to operate based on those rules.

Here’s a quick rundown of the options to help you get started on your way to success.

Sole trader

Being a sole trader is also known as being self-employed. You are the owner of the business and in full control of it. It means that you can keep all the profits after paying tax and National Insurance. You are also personally responsible (or ‘liable’) for any debts generated by the business.

You can be a sole trader as well as employed elsewhere. For example, if you work full time during the day and run your own business in your spare time. You can operate under a business name, or you can work under your own.

You must keep financial records of all business activity and submit these figures to HMRC so they can calculate how much tax and NI you must pay.

Partnership

A business partnership as a legal structure means that you and your partner share the business profits, and the personal responsibility of any debts. Your partner can be a person or a limited company. Partnerships must choose a name to operate as, and one of the partners must be the ‘nominated partner’.

Each partner must register as self-employed and is responsible for submitting information and paying tax on their own share of the profits.

The nominated partner is also responsible for managing the bookkeeping and tax information on behalf of the partnership itself.

It’s usually a good idea to document the partnership agreement amongst all involved. This makes it clear how to split profits, expectations, and what to do if someone wants to leave the partnership.

Limited Liability Partnership (LLP)

As its name suggests, an LLP limits the extent to which partners are liable for any debts incurred by the business. Unlike a sole trader or partnership where those involved are wholly responsible for any debts, an LLP (similar to a limited company) means that members are only liable to the extent of their investment and any personal guarantees against loans.

At least 2 partners must be ‘designated members’, and they are responsible for filing account information about the partnership. Each partner must also register as self-employed with HMRC and pay tax on the income they earn from the business.

LLPs must register at Companies House. As with other partnerships, there should be a partnerships agreement which details how to share out the profits, and who is responsible for what.

Limited Liability Company

This is a business which incorporated to a legal structure in its own right, separate to the people who founded and own it. It is limited by shares, so there are shareholders. Their personal assets are protected against any loss within the business, but they may lose any investments they make in that business.

There must be at least one director and one guarantor. These can be the same person, or there can be multiple directors and guarantors.

To be incorporated at Companies House limited companies must pay an application fee, and register online.

 

 

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