Which legal structure is right for your business?

The legal structure you choose for your business is one of the most important decisions you will make in the start-up process. There are generally four basic types of business entities, each of which has its own pros and cons.

Sole trade

  • Low cost and easy to set up, with minimal financial reporting.
  • The law makes no distinction between the business and its owner, therefore, liability is unlimited. Any business debt may need to be met from the owner’s personal wealth if the business fails.
  • Your profits are taxed as income, at personal income tax rates each year, regardless of whether the funds are withdrawn.

Partnership

  • Very similar to a sole trade but includes more than one individual.
  • In a standard partnership, all partners are also responsible for all the debts owed by the business, therefore liability is unlimited.
  • The profits of the partnership are taxed as income for the partners, regardless of whether the funds are withdrawn.

Limited Liability Company

  • Administrative and regulatory demands heavier, ownership details and annual accounts must be filed at Companies House.
  • Limits the shareholder's liability to the amount invested in the business and any personal guarantees given.
  • Corporation tax (current rate 20% reducing to 17%) is payable on the profits of the company.
  • Income tax is only payable whether profits are extracted.
  • Can open up access to tax reliefs only available to a company. One such relief is Research and Development tax credits that can offer a cash injection to the right start up.

Limited Liability Partnership

  • A hybrid between a Limited Liability company and traditional partnership.
  • Greater flexibility as based upon a partnership agreement.
  • Limits the member's liability to the amount invested in the business and any personal guarantees given.
  • Profits taxed in members in a similar manner to a standard partnership above, regardless of whether funds are withdrawn.

Your choice of structure can greatly affect the way you run your business, impacting everything from liability and taxes, to control over the company. The key is to figure out which type of entity gives your business the advantages when it comes to helping you achieve your organisational best.

This advice section is brought to you by Magma Chartered Accountants

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