Which structure is right for your business?

According to Max Perry from our accounts department, your choice of business structure can have a pretty fundamental impact. So which ticks the boxes for your own set of circumstances?

Business structures impact how you operate day-to-day, as well as – crucially – the legal requirements you have to observe. Each structure has their own advantages and drawbacks, so choosing the right one is essential to running your business effectively. The three primary types of business structures are sole traders, limited liability companies or business partnerships.

Sole Trader

Sole trader status is ideal for those who plan to generally work alone and have a low-risk business. where the likelihood of becoming insolvent is minimal. This is due to the fundamental disadvantage of having unlimited liability for your financial obligations, leading to the potential of your personal assets being seized to repay business debts.

However, being a sole trader means that your tax reports will be a lot more straightforward since only expenses, income and any capital allowance you may have need to be included in your personal income tax return. Furthermore, any business losses can be used to reduce otherwise earned income, which can lead to an overall lower income tax liability. You also won't need to file annual reports with Companies House, which will leave more time free for you to focus on your business and maintain a higher level of privacy.

Limited Liability Company (LLC)

If you instead wish to have the security of an LLC, the business becomes established as a separate legal entity. This can be particularly beneficial where a notable element of risk is involved. For instance, when taking out a substantial loan to help fund your business' liquidity, you would otherwise become personally liable for any debts outstanding if the business doesn't have enough assets to repay this debt. As an LLC, your personal assets are protected in this instance.

This business structure also offers legal protection from any significant employee mistakes, and it also allows the business to be more easily passed on/sold. Arguably the most important benefit, however, is that directors may take advantage of a tax efficient combination of a salary through PAYE and dividends. The fact that corporation tax is relatively lower than income tax rates, less tax will need to be paid on your business activities. helping to grow your business through higher retained earnings.

It will be necessary to keep a set of accounts when becoming an LLC due to the responsibility to file annual accounts as well as statement of profit and loss. This adds a substantial burden if you choose to maintain a record of these yourself and can quickly become complicated if you're unprepared and don't fully understand how to record everything correctly. A good track record of filing accounts, preferably with healthy profits, is also key to securing loans from banks and credit facility with suppliers. Moreover, once filed with Companies House, your annual statements will be visible to the public, so if a high level of privacy is important to you, you may be inclined to instead remain unincorporated.

Business Partnership

An 'ordinary' business partnership is the final primary type of business structure and can be considered similar to a sole trader, in the sense that the costs, responsibilities and risks are shared by its owners. However, this risk is amplified in a partnership, as this shared liability can lead to financial repercussions for the actions of other partners. Nevertheless, this risk may be limited by the other types of partnerships: Limited Partnership and Limited Liability Partnership.

This business structure is suitable for groups of two or more individuals wishing to pursue a business endeavour together, as it allows for profits and losses to be divided amongst the partners, upon which income tax is then paid. As more partners become part of the partnership, more capital is available which could help aid the growth of the business by reducing the necessity to borrow and increasing the amount of combined resources – both physical and intellectual. On the other hand, this leads to a higher potential for conflict to arise, so partners mut be willing to compromise and demonstrate flexibility.

If you require further assistance in regard to any business structure or would like to hear more specific advice on which is best for your needs, we can offer our specialist advice and guidance here at Page Kirk.

Call 0115 955 5500 or email enquiries@pagekirk.co.uk