The legal form your business takes can have significant implication on your personal risk in the business as well as your potential for financial returns.
Your choice of structure will largely determine how your business income will be taxed. I will cover the main 3 areas, sole trader, partnerships and limited companies. However there are other options such as limited liability partnerships, community interest companies or a social enterprise to mention a few and we recommend you seek further professional advice on what is most relevant to your personal circumstances.
If you operate as a sole trader, you and your business are legally inseparable.
Advantages: – you have Sole control therefore straightforward decision making, you have fewer restrictions over the withdrawal of monies from your business.
Disadvantages: – You personally bear risks and liabilities of the business.
For taxation purposes, as a sole trader business profits will be taxed alongside any other personal income. You will be required to pay a flat rate of Class 2 National Insurance and will pay income tax, as well as Class 4 National Insurance, at a percentage on the taxable profits of the business.
In terms of accounting, you will need to submit an annual self assessment return to HM Revenue and Customs and will need to keep accurate and up-to-date records of all business transactions and accounts.
This is where two or more persons act as co-owners of the business. Similar to a sole trader, there is no legal separation between the business and the partners.
Advantages: – you share the risks and liabilities with the other partners, The diversity in terms of individual’s attributes can be brought into the business.
Disadvantages: – You share the business profits with the other partners, often disputes between partners are seen, You can be held personally responsible for another partner’s negligence or carelessness.
For taxation purposes, business profits are shared in accordance with the partnership agreement and each partner is taxed on their proportion similar to that of a sole trader.
This is a legal entity in its own right. Individuals own shares in the company by which they can exercise control. As a separate entity, the company is taxed separately.
Advantages: – Indefinite existence as the company can continue beyond the lifetime of any one member, the company bears its own liabilities therefore protecting the owners, bringing people into the business through the medium of a limited company can be much easier.
Disadvantages: – There are additional requirements in terms of administration and deadlines. The company information is publicly available on Companies House.
The company is liable to Corporation tax on its profits at a published percentage. Potentially monies may be withdrawn by the company owners through salary and/or dividends which will be subject to tax and National Insurance on the individual. There is potentially tax planning opportunities available to individuals in terms of how they structure the withdrawal of funds.