It’s important to decide on the structure of the business right at the start. It could affect the amount of tax payable, the liability for debts and the ability to raise further finance.
The most common structure is the sole proprietor. It’s easy and simple to set up and manage. There are fewer legal controls and could mean fewer taxes. On the other hand all the debts of the business are the responsibility of the owner. It can be viewed as lacking credibility and it could be difficult to raise finance.
This is an agreement between two or more individuals to share the management and profits of the business. While it might be easier to raise finance but the partners are still the responsible for all the debts of the business. Each partner must register as self employed and submit a tax return.
While a partnership is fairly easy to form, manage and run there could be problems if the partners disagree.
Limited Liability Partnership
In a limited liability partnership some or all of the partners have limited liability and at least two partners have the responsibility for filing accounts. It has to be registered with Companies House. While it has the advantages of a limited company and a partnership combined, for tax purposes it is treated as a partnership. Each partner has to pay tax on their share of the profits of the partnership.
Private Limited Company
While there is more legislation / paperwork involved in setting up a limited company there can be many advantages.
- Less personal exposure to the debts of the company. Shareholders are liable only to the extent of their investment in the company.
- It tends to lend credibility to the business which would make it easier to raise finance
- Many prospective clients prefer working with companies as opposed to sole traders.
- It could be easier to sell the business.