3 different types of business structure
6th August 2018
One of the earliest things to consider when starting a business is its structure, which determines among other things how you will pay tax and the records you need to keep.
The 3 most popular options in the UK include going down the sole trader path, entering into a business partnership, or forming a limited company.
According to the Office for National Statistics, sole traders made up 60% of the UK’s 5.7 million-strong business population in 2017, with 33% being limited companies and 7% in partnerships.
In this month’s blog, we weigh up a few of the pros and cons of these business structures with the aim of enabling you to decide which option best suits your business and its future needs.
There are more than 3.4 million sole traders operating in the UK, many of whom are attracted by the simplicity of this approach. You just need to inform HMRC that you’re going self-employed, register your business' name and away you go.
As far as tax is concerned, you pay through self-assessment and have the option to make class 2 national insurance contributions that count towards your state pension.
Pros of being a sole trader
- you keep all of the after-tax profits as the sole owner of the business
- you have full control over the running of your business
- there are very few forms to fill in.
Cons of being a sole trader
- you are personally liable for any debts incurred by your business
- you are personally liable if a client decides to sue you.
Despite more admin being involved, setting up as a limited company is the second most popular business structure in the UK with around 1.9 million currently registered.
Pros of setting up a limited company
- there is less risk as owners are not liable for debts or legal liabilities
- you can be paid through PAYE and/or dividends (if you’re a shareholder)
- you pay corporation tax on the company’s profits at 19% in 2018/19 – relatively low compared to other forms of tax.
Cons of setting up a limited company
- more paperwork – a memorandum of association, articles of association, directors’ statement, registration and compliance with Companies House, and self-assessment for directors
- less privacy – the confirmation statement, office address and your name will all be in the public domain.
Partnerships are simple business structures where 2 or more self-employed people share the costs, the profits or gains and the responsibilities, unless the partnership agreement states otherwise.
Pros of entering into a partnership
- there’s no need to register with Companies House
- it’s a simple business structure
- responsibilities and profits are shared among the partners.
Cons of entering into a partnership
- all business partners are equally liable for debts
- there’s a perceived lack of transparency, as accounts are not filed with Companies House
- it does not have legal status – the partnership dissolves if a partner dies.
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This blog is only a very brief introduction to the 3 most popular business structures in the UK, and we haven’t even touched on limited liability partnerships (LLPs) which are another option.