Sole trader, limited company or partnership? This article gives an overview of some of the different legal structures available to the small business owner and how to go about choosing the right legal structure for your business.
What legal structures can I choose?
When you start your own business, one of the first things you’ll need to do is choose a legal structure. The type of legal structure you choose will impact on:
the amount of tax you pay
the amount of control you have over your business
the amount of paperwork you’ll need to deal with
any profit your business makes
your responsibilities if your business makes a loss.
This is the most common and simplest form of business structure. This is where you trade on your own on a self-employed basis.
There is no legal distinction between you and your business – you are considered the same entity.
You are in charge of all aspects of your business – you can keep all your business’s profits after you have paid tax on them. You will also be personally responsible for any debts of the business.
You will be liable to income tax on profits and be liable to class 4 and class 2 NIC (class 2 is to be abolished from 6 April 2018). You will need to file a self-assessment return every year. Once your takings exceed £85,000 per year (from 6 April 2017) you will need to register for VAT.
Companies are owned by shareholders and run by directors. They can be limited (usually smaller where shareholders are selected) or public (where shares available for purchase on a stock exchange).
Most limited companies are limited by shares, meaning the shareholders’ responsibilities for the company’s financial liabilities are limited to the value of the shares that they own but haven’t paid for. The shareholders of the company will usually have limited liability for debt of the company i.e. they will not be responsible for the debt personally.
There is more administration in relation to a company – every year a limited company must put together statutory accounts and send an annual return to Companies House and a Company Tax Return to HMRC. A limited company must comply to statutory rules and disclose information to the public.