The structure of your business can have a big impact on how you and your new enterprise are taxed and the obligations that you face.
Sole traders – From a legal and tax perspective you and your business are considered a single entity.
As such, you are held personally responsible for the business and its debts.
Your profits are declared via a self-assessment tax return and classed as your annual income for that year, regardless of whether you receive this as a salary or it is held in your business’s bank account.
As a sole trader, you do not have to submit information to Companies House each year, it may be easier to take money out of the business and it can be easier to set up and close your business but remember you are personally liable for the debts of your business.
Partnership – Partnership are similar to sole traders but differ in that they have more than one owner.
Under a partnership arrangement, each partner owns a specified percentage of the profits but is also liable for these profits and must pay tax on them as they are treated as income.
Each partner must complete a self-assessment tax return to record and report their income to HM Revenue & Customs.
Depending on the type of partnership formed, partners may be held personally liable for debts and other obligations.
Limited liability partnerships share many of the same characteristics of a conventional partnership, such as the internal management, tax liability and the distribution of profits, but also provide the limited liability of an incorporated company, without the same obligations.
Limited Company – Incorporating a business is a popular choice for many business owners, as the business becomes a separate legal entity entirely.
The company will be owned and controlled by those who own its shares. These shares can be owned by a single person or multiple people and can be sold to raise money for the company.
Limited companies must be registered at Companies House and have to submit annual accounts and statements under Companies House rules. They will also have certain standard legal documents that govern what they can and can’t do.
Instead of partners or owners paying tax via their tax return, Limited Companies are subject to Corporation Tax and must submit an annual Corporation Tax return which records your company’s:
- Income and expenditure
- Details of any stock on hand at the end of your financial year.
Choosing to operate as a limited company comes with significant benefits for owners and shareholders, including improved tax efficiency and reduced risk from liabilities.
It is important to carefully consider which structure suits your business and how it may affect the tax that you owe and your legal obligations.
It is possible to change your business’s structure later in its life.
Operating as a company may also add a level of credibility that you may not associate with as a sole trader.