Choosing the right business structure can be a confusing concept for many business owners.
Clive Lewis, ICAEW Business Advice Service, provides an outline of the business structures available and what it means for your income tax returns.
What business structure should a start up adopt?
One of the first decisions for a start up business is deciding on a business structure that you will trade under. Sole trader, partnership or limited company. The business format that you choose will affect the amount of tax the start up pays. It will also impact other areas such as liability for losses. It should be decided after consideration of the issues.
Let’s explore the three basic business structures and what they involve
Setting up in business on your own gives you complete control and fewer administrative burdens.
However, you also have unlimited liability and you could therefore risk personal loss if something were to go seriously wrong.
Sole traders include an annual Self Employment return with their Self Assessment tax return. They pay Income Tax and National Insurance contributions on the profits.
Fins out more about becoming a sole trader.
If two or more people run a business together as partners, they share profits or losses and unlimited legal liability. It is essential to define the rights and responsibilities of partners and to set them out in a partnership agreement.
All partners include an annual Self Employment return with their self-assessment tax return as well as a Partnership Tax return (showing how profits were divided between the partners). The also pay Income Tax and National Insurance contributions on their share of the profits.
Learn about the different types of business partnerships.
A limited company is a legal entity separate from its owners. Ownership can be changed or extra capital raised through the selling of shares, without necessarily affecting the management of the company.
However, there are a number of additional legal requirements with limited companies which can substantially add to the time and money spent on administration.
Companies file a Corporation Tax return with HMRC which summarises its annual trading results and pays Corporation Tax on the taxable profits. Companies must submit annual accounts and other information to Companies House.
Understand the benefits and drawbacks of operating a limited company different.