Take advantage of the benefits of starting as a sole trader, partnership, limited liability company, or a limited liability partnership.
You’ve brainstormed, researched, studied, and practiced. Now you’re ready to launch your business. But what form of business should you register?
Keep in mind that you can always change your business’ form as the company grows or as your needs change. You might start as a sole trader and later want to let a partner buy into the business. You might start as a limited company and then transition into a public limited company when you want to raise funds via the stock exchange.
The most common structures for a new business are a sole trader, partnership, limited liability company, and limited partnership. The following outlines the benefits and risks of each. Once you have decided on your business structure, you can register a company name with Companies House and begin operation.
Sole Trader for the Soul of the Company
If you are the only owner of the business, you can register as a sole trader via a formations company. A sole trader business structure is fitting for any self-employed owner of an establishment or an independent contractor performing work for other businesses or clients.
Being a sole trader does not mean that you are the only person performing work for the company. You can hire employees as you need to scale your business.
Benefits of registering as a sole trader:
- You do not need others to ratify your decisions
- You are entitled to all profits
- You can deduct businesses expenses from your taxable income
- It is free and easy to register
You can plan and operate your business the way you see fit with light regulation. If you do well, you reap the reward!
Risks of registering as a sole trader:
- You must pay for all company expenses and cover any debt the company incurs
- Business halts if you are unavailable to make decisions
- HMRC taxes your profits as income at increasing rates
The law does not distinguish between a sole trader business and the owner for liability purposes. If the company suffers a significant loss, you could go bankrupt. If someone sues the company, you are the defendant.
When your profits reach £41,865, your tax rate will increase to 40%. It will increase again to 45% when your profits reach £150,000.
If you are confident in the surety and safety of the business and are ready to take on the responsibilities of the company yourself, registering as a sole trader could reward you with the most profit.
Partners Share the Load
If there are two or more owners, you can register as a partnership. You can operate a partnership very much like a sole trader if you are partnering with a family member, friend, or like-minded business partner. You’ll simply need to agree on how to share responsibilities, expenses, and profits.
Benefits of registering as a partnership:
- You have another investor to share expenses
- You can validate your plans with your partner for a more successful business
- You have a backup decision-maker and business head if you are unavailable
Risks of registering as a partnership:
- You must share the profits according to your agreement
- You will need your partner’s agreement concerning business decisions
- You will be liable for your partner’s business expenses
- When your profits reach £41,865, you will need to pay 9% for National Insurance contributions
Make sure that you know the habits and maturity level of your partners. If they unwisely incur a large expense, you will be held just as responsible for that expense as they will be.
Limiting Your Liability
You can incorporate as a limited liability company even as the sole owner. Understand, though, that if you are the sole owner, you are not limiting your liability at all.
Benefits of registering as a limited liability company:
- The public will view your company as more professional
- It will be easier to secure loans for business growth
- Liability is shared by multiple owners, and limited by the value of your shares
- Your personal taxes will likely decrease
Risks of registering as a limited liability company:
- You must share ownership via publicly-traded shares and gain majority approval for major decisions
- You will need to file additional yearly reports with Companies House and HMRC
A small limited liability company pays corporation tax of20%. Owners then pay income taxes based on the salaries they draw from the company.
More Control, Less Risk with an LLP
A limited liability partnership combines the advantages of a partnership and a limited liability company. Because it is a combination of two models, we’ll simply highlight the unique aspects of this model.
Benefits of registering as a limited liability partnership:
- You decide who owns shares in your company
Risks of registering as a limited liability partnership
- All partners pay income taxes on their share of the profits without a corporation tax buffer
Estimating your expected income level and risk of liability will help you decide which form of business to adopt.