There are a number of options, all of which have their merits and differ in legal and taxation terms – but your four key options are as follows:
- Sole trader;
- Limited liability partnership (LLP); and
- Limited company
Going soloIf you take the sole trader route, you and your business are one and the same – from both a tax and legal perspective. You are personally responsible for the business – and indeed any debts it incurs. The profits your make (sales minus costs) to 5 April each year are declared on your annual self-assessment tax return (online deadline 31st January!) and classed as your personal income that year – even if it is not paid out as salary or into to your personal bank account. You must pay income tax and national insurance on this at the standard income tax rates. You do not need to register the business as such, but you should tell HMRC that you are operating a business.
Partnering upSimilar to a sole trader arrangement but with more than one owner, a partnership means that all partners own a specified percentage of the profits – and the liabilities – and pay tax on that percentage of them. As with a sole trader, each partner’s share of the profits is treated as their income.
Limited liability partnershipThis is a partnership that also has some characteristics of a limited company. LLPS tend to be used by professional services firms such as solicitors and architects.
LTDWith a limited company, the business becomes a separate legal entity in itself. Therefore the company must be formed, or incorporated, and registered at Companies House. It will also have to have certain standard legal documents that govern what it can do and what business it operates in. The company will be owned and controlled by those who own its shares and you can allocate shares to any number of people when the company is incorporated. You could retain all of the shares for yourself, allocate some to a spouse, or sell the shares (‘equity’) to raise funds. While this does require more administration – for example annual accounts being filed at Companies House and an annual corporation tax return – these can be taken care of quickly by an accountant. There are also significant benefits to having a limited company, including:
- They tend to be much more tax efficient, due to the ability to receive income in the form of both salary and dividends;
- They separate the liabilities (debts) of the business from that of the owner(s), reducing the risk if things go wrong;
- They tend to convey a more professional image of the business; and
- They are easier and more flexible when it comes to raising investment and funding – since equity can be sold.
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