The Setting Up A Business Series – Business Structure

September 10th, 2014 by

In the first of UK2’s Setting Up A Business series, we look at business structures and their pros and cons… 

Setting out on your own can be the most rewarding experience of your life. Your own rules, your own concept and your own plans. Along with the rewards, however, come the hardships, and it’s important to set out the business structure that’s right for you from the get-go. The growth and expansion of your company could depend heavily upon your early decisions, so it’s best to consider your options when standing at the structural crossroads. We’ve set out the basics of the four main structural options for your business, outlining the pros and cons to help you decide on the one that’s right for you.

There are many options to choose from when picking out a structure for your new business.

Community interest companies, co-operatives, offshore companies, franchises and public limited companies will not be focused on here. This guide is for start-ups who want to begin with the simplest structure your business will allow.

So, from here on in we’ll be wondering: Will you be setting out as a sole trader? Forming a partnership? Incorporating a limited liability company? Or a limited liability partnership? Let’s discuss…

Setting out on your own?

If you have no immediate plans to hire any employees, registering as a sole trader might be the best option for you. Most new businesses set out with a sole trader model. One the best bits is there are no registration fees which allows you to get straight to it! Although you’re not restricted from employing staff, most sole traders provide a service; think photographers, electricians and small shop owners.

The pros

You’re in charge. There’ll be no more waiting around for the go ahead on any of your ideas, they’ll be rolled out in real-time as directed by your intuitive flow. This control can add real personality to your business, as you act as the face, brains, legs, eyes, ears and any other anatomical vehicle your business requires. When starting out, you should also feel the benefit of many tax-deductible expenses such as travel costs and premises. As the business will be yours and yours alone, the profits will be too. Without expensive outgoings to employee wages, you’re free to have your cake and, well, eat it all to yourself.

The cons

You’re in charge. Although this may seem cynical, there’s the old “two sides to every coin” argument to all of the above pros. The decision making falls entirely on your shoulders, and at times this can be a heavy burden to bear. You’ll be liable for any business mistakes; financial and legal. If the business should get into debt, you yourself would be liable, as with any other difficulty you may face when setting out on your own. In relation to these financial strains, your profits will all be taxed as personal income, which can become a problem as your business expands (as soon as you top £35,000, you can kiss goodbye to 40 percent).

Dynamic Duo?

If you’ve got a friend in your field, doubling up and forming a partnership could be for you. Your combined skill-set could make for a brilliant working relationship, be it with your husband, wife, or friend from down the road. For a small business, starting out as a partnership can be a great structural plan; the way it allows for flexibility and creative control combined makes it arguably the most appealing of these four plans.

The pros

A partnership can be as flexible as a sole trader, but with less liable strain. For example, the business won’t suffer if one partner is unwell or wishes to take a holiday. Working with someone else, you can learn from each other’s strengths and advise upon each other’s weaknesses, riding the steep learning curve of all new businesses together. Start-up capital would be doubled, tripled and so on depending on the amount of partners, so pairing up can be a great option to get the ball rolling with maximum funds. Your decisions will all be shared, with input coming in from all sides; you’ve heard that two brains are better than one, right?

The cons

The big one here has to be the possibility of a falling out. We can all picture it; one idea being deemed more important than another, one partner having a nicer cat than the other. Humans can argue about anything, and in the stressful environment of a partnership, where all decisions must be made and agreed upon together, there’s bound to be friction. The necessity of shared decision making can detract from the freedom felt by sole traders, and so some may feel that perhaps two brains really aren’t better than one. Financially, both partners will be taxed in the same way as sole traders, based on an individual self assessment tax return. This can prove to be expensive (see sole trader cons).

Adding a ltd to your company

Incorporating a limited liability company (ltd) means registering a limited company or LLC with Companies House. Your personal and business spheres will become separate with this model, effectively protecting your personal assets should the business fail.

The pros

When the time comes, is can be easier to borrow money than when you’re setting out on your own. Limited liability allows you to build a wall between your personal assets and your company’s liability; separating your work and home life can be a comfort to you financially. The status which comes with being the managing director of a limited company is a real plus, and being an LLP brings credit to your business. Not to be overlooked is the favourable tax regime: limited companies pay corporate tax, and their directors are taxed as employees (UK small profits corporation tax rate, applied up to £300,000, is 20 percent and only rises to 26 percent once profits exceed £1.5m).

The cons

Most limited companies are owned by their shareholders and limited by shares, which detracts from the personability of a sole trader or partnership company. Your administrative responsibilities will sky rocket, with full statutory accounts, a company tax return, monthly or quarterly payments of employees’ income tax and statutory accounts and an annual return to Companies House being among the short-list of admin duties.

Incorporating a Limited Liability Partnership (LLP)

Bridging the gap between an LLC and a Partnership, we find the Limited Liability Partnership business model. The youngest of all four of our business-ey structures on this list, an LLP provides the limited liability available to limited company shareholders, combined with the tax regime and flexibility available to partnerships. If your business is in the financial services sector, such as an accountancy or law firm, then LLP could be the route for you.

The pros

An LLP has all the pros of a limited liability company (handily transcribed for you in the above section of this post). The number of partners allowed is unlimited, although at least two are required to be ‘designated members’ to file annual accounts (a list of which can also be found in the cons of the LLP – how handy). Members’ assets are protected, living up to its ‘limited liability’ namesake.

The cons

Each member must register with HMRC as self employed and declare their income; the members’ share of profit is determined when they register with Companies House (which they must also do). An LLP has an expiry date, however. It must be launched within a year of registration, before it is struck off.

Whether you’re a lone ranger, or a team player, we’re hoping that you’ve taken some much-needed inspiration from these pros and cons. Setting out can be a difficult time, and a nudge in the right direction can help you really bring home the bacon in the long-run. Here’s wishing you luck…

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