Choosing a Business Structure
Choosing your Business Legal Structure
Choosing the right Legal structure for your business is very important. Not only will this affect your legal
responsibilities and tax implications, but also how you may be perceived as a business.
Some of things that you should consider when it comes to legal and tax implication are:
- Administrative burden of paperwork that needs to be completed to start your business
- Taxes that you will have to pay and any exemptions or reliefs that may be available
- The way you are allowed to take money out of the business
- How you will be personally responsible should anything go wrong
Remember you can change the business legal structure you initially chose at start up to a new structure that suits your
business better. However, changing it at a later stage can be costly and sometimes quite inefficient.
Types of Business Structures
In simple a Sole trader is someone who chooses to work for themselves. You will need to notify the HM Revenue and Customs (HMRC) that you have started trading your
own business. Starting a business as a Sole Trader is probably is quickest and easiest way, but not always the most tax efficient.
As a Sole Trader, you run your business as an individual and not as a legal entity. All your business’s profits after you’ve paid
tax on them are yours.
In addition, Sole Traders also benefit from having the least administration burden of filing and compliance, however beware, as a Sole Trader you are personally liable for your business debts.
A Limited Company (whether a Private Limited Company (LTD) or a Public Limited Company (PLC) is a separate legal entity from the owner,
formed to run a business. It is one of the most common structures chosen for new businesses. The key benefit of having a Limited Company
comes from the fact that it’s a separate legal entity, and hence is responsible for its own debts and liabilities rather than the owner. In addition, it usually
has more favourable tax treatments than Sole Trader. As with everything, the catch here is the increased compliance and administrative burden than comes with the package.
The clue is in the name, a Partnership allows you and your business partners to form a business together, sharing responsibilities and profits. There are two different ways this can be achieved. Through a normal Partnership,
where each individual is treated in a similar way to a Sole Trader when it comes to tax and personal responsibility. Alternatively, a Partnership can be setup under a Limited Liability Partnership to benefit from the corporate veil that Limited Companies normally benefit from.
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