Even if you have a great business idea, the knowledge and a clear demand for your product or service offering, deciding what structure the business should follow can be unclear. Read our latest blog to find out more.

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Depending on who you ask, the amount of basic business structures varies. GOV.UK will tell you that that there are three – sole trader, partnership and company. However, there is more than one type of company and this is when the number can rise to six.

What do I need to decide?

What types of business structure are there and what do they mean?

Sole Trader – This is when one business owner is promoting and selling their product or service – the business can still have employees and use subcontractors. While this is the simplest way of structuring a business, accounting records and meeting legal obligations are still important.

As a sole trader it is important to remember that as the business owner you are personally responsible for any debts. As such, structuring as a sole trader can be useful if your business doesn’t have higher loan or borrowing commitments and not a lot of money is needed to begin trading.

Corporation tax is not paid for by sole traders, self-assessments are used to pay income tax and national insurance contributions (NICs).

Partnerships – Here, there are at least two business owners – liability for debts is shared by partners meaning that a written agreement prior to entering the partnership is recommended. This can make transitioning much easier, for example if one partner decides to move on or reduce their level of responsibility.

Limited liability partnerships (LLP) – retain the tax liabilities and distribute any profits in the same manner as regular partnerships, yet partners have a reduced financial liability. LLP structures are often adopted by property companies and professional service providers such as solicitors and architects.

Limited company – This is probably what you’re interested in if your business is already trading. Limited companies are legally separate, meaning that you’re not personally liable for any debts incurred (you may still lose invested funds). Whilst you may be offered to set up a company off-the-shelf, it is unlikely that the full scope of your options will be explained – meaning you may not be aware of the optimal setup for you.

What types of companies are there?

Company limited by guarantee – The smallest of all structures that does not consider share capital, meaning that not-for-profit organisations often follow this structure. Members, who tend to be directors of the firm have a limited liability if the company goes into liquidation. If someone wants to move on, the shape of the company will not change, making it easier to change personnel than in a partnership.

Company limited by private shares – Shares are privately traded and held allowing business owners more control over who holds shares. Shareholders then become liable for the debts of the company in relation to their investment. This means that capital can generate from share issue, which can be helpful if your business needs greater investments.

Community interest company – CIC’s are not set up with the intent of generating private profit, but rather reinvest profit back into achieving the goals of the organisation and paying salaries. Some CIC’s are owned by existing charities, social enterprises or trading arms and many have aims to raise funds or help to train and employ vulnerable people. This means that the majority are on the borderline of being either a charity or business.

Public limited company – PLC shares are openly traded and sold. They require a minimum of £50,000 in share capital, so it’s more likely to be something that comes into consideration when the business is up and running.

Who do I notify?

Sole traders and partners need to report to HMRC, whilst Companies House maintain all the records for limited companies.

Companies of all sizes must file accounts, a corporation tax return and confirmation statements, these inform the relevant bodies of who the directors of the company are and relevant shareholders.

If you’re both an employee and director of your company, you’ll be liable for the usual PAYE and employers NICs for employment tax purposes.

VAT

Tax liabilities such as VAT are calculated based on annual taxable turnover, rather than the legal structure. Here, the same rules apply to companies than to sole traders and partnerships. Legally speaking, you are obliged to register for VAT when your turnover is greater than £85,000, but you can voluntarily register any time that you like.

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Any questions?

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