After deciding to go into business the question of what structure to trade under can often be the most confusing. There are numerous factors that can influence the decision as to what business structure to use, far too many for us to list in full here, but include;
- Are you going into business alone or with others? If others, is your business partner your spouse?
- Your income position and whether you plan to extract profits in full, in part, or not at all in the first x years.
- The industry you are going into.
- Your family position
- Your future plans for the business and you personally
With so many considerations in play we have listed the key advantages and disadvantages of each option;
Sole trader
Advantages
- The simplest structure and only requires registration with HMRC
- Taxed on profits in full, meaning anything drawn out of the business requires consideration of the working capital position and not tax effects.
- The cheapest from a compliance perspective as only requires submission of a personal tax return
- Your results and/or position are not available to the public as there are no registry filings
- Do not require an audit regardless of size
Disadvantages
- Possibly not the most tax efficient depending on results
- Unlimited liability – which is a big consideration, especially if you are operating in a high risk industry. The business debts are your debts
- Excludes access to some tax schemes such as Research and Development claims
- May be a barrier to growth – both in terms of customers who may fear continuity if something should happen, and also in recruiting new staff
- All of the profit is taxed regardless of if it is extracted which can be challenging when reinvesting in the business
Partnership
Advantages
- Easily adapted for incoming or outgoing partners
- The results and/or position are not available to the public as there are no registry filings
- Do not require an audit regardless of size
- Profit shares between partners can be easily changed to reflect performance
- Taxed on profits in full, meaning anything drawn out of the business requires consideration of the working capital position and not tax effects
Disadvantages
- Possibly not the most tax efficient depending on results
- Unlimited liability – and also vicarious liability between partners, i.e. the actions of one partner bind them all
- Excludes access to some tax schemes such as Research and Development claims
- Can be difficult to recruit new partners due to the unlimited liability
- All of the profit is taxed regardless of if it is extracted which can be challenging when reinvesting in the business
Limited Liability Partnership (LLP)
Advantages
- Easily adapted like a traditional partnership, but offers limited liability to members often making recruitment easier
- Profit shares between members can be easily changed to reflect performance
- The LLP is its’ own legal entity so can enter into contracts
- Can have different levels of members – designated and non-designated
Disadvantages
- The LLP has to publish its’ results and/or position and details of who the members are with Companies House
- All of the profit is taxed regardless of if it is extracted which can be challenging when reinvesting in the business
- Possibly not the most tax efficient depending on results
- Excludes access to some tax schemes such as Research and Development claims
- Will require an audit once the thresholds are met
Limited Company
Advantages
- The company is its’ own legal entity so can enter into contracts
- Limited liability (there are occasions when this can be disapplied)
- May be more tax efficient, greater opportunity for tax planning, and access to more tax schemes such as Research and Development claims
- Less or no tax exposure on funds that are reinvested in the business
- Greater investment opportunities with initiatives such as crowd funding, but can also consider EIS/SEIS in order to give benefits to investors
- Tax schemes may be available to help incentivise employees
Disadvantages
- Statutory compliance can be onerous and there are legal obligations on the Directors
- The company has to publish its’ results and/or position and details of who the directors and shareholders are with Companies House
- Accounting requirements are more time consuming and complicated
- Will require an audit once the thresholds are met
The above are not exhaustive lists and every scenario is unique and will require careful consideration in order to establish the right structure. That is why at Veritons we invest the time in the relationship to fully understand the proposed business and the individual(s) behind it. We don’t cap the free initial meeting at an hour – it’s as long as is needed to ensure the right advice can be provided. If you are thinking of starting a business and would like to discuss what the right structure is for you, we’d love to hear from you. Remember, if you decide on an LLP or Limited Company you will need to register at Companies House, therefore you should check availability of your planned business name.