Deciding how to operate your new start-up business requires consideration. The business legal structure that you choose affects how the business operates. It also has an impact on other obligations, such as the amount of tax you pay, and how you pay it. The kind of business that you decide to operate as affects how you register the business with HMRC, too.
You can download our guide to starting a new business using the link below, but in this article, we want to explain the different types of business structure which start-ups might choose.
Here’s a quick rundown of the options to help you start on your way to success.
The basics of being a 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 of the profits that you make after paying tax and National Insurance.
Because you are not legally separate from the business, you will be 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. This is done using a Self Assessment tax return.
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, a limited company, or even another partnership. Partnerships must choose a name to operate as, and one of the partners must be the ‘nominated partner’.
As well as registering the partnership as an entity, each partner must register for Self Assessment. Each partner is responsible for submitting information and paying tax on their own share of the profits. The nominated partner is 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. Our guide explains the rules and responsibilities involved in setting up a new business 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 up to amount they invest, or 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 exists as a legal structure in its own right, separate to the people who found and own it. This protects their personal assets 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.
Talk to one of the team about our online accountancy services for different types of businesses. Call 020 3355 4047, or ask for a free call back.
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