You’re ready to start your business! Your business plan is solid. You’ve worked everything out in terms of financing and operations. All you need to do is form your company! But do you know how to choose a legal structure for your new business?
The legal structure of your business will determine which paperwork you need to get your business started, the business taxes you’ll have to pay and your financial responsibilities of the business. Once you’ve started your business, you may find that a different structure would suit you better and it is possible to change the legal structure. But the decision you make in choosing a company structure will affect the growth of your business.
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How to Choose a Legal Structure for your New Business
|Sole Trader||Partnership||Limited Company|
|Who owns it?||The individual||The partners||The shareholders|
|Who manages it?||The individual||The partners||The directors|
|Who is liable?||The individual||The partners||The company|
|Who pays tax?||The individual||The partners||The company|
|What type of tax?||Income tax||Income tax||Corporation tax|
If you’re self-employed (you work for yourself), then you are a sole trader. You run your business as an individual and are entitled to all profits after tax. You are personally responsible for any business losses. You can employ staff, but you are singularly responsible for the business. (If you don’t have any staff at all, this structure will probably serve you best.)
Most new businesses are sole traders – it’s easy, inexpensive and very little paperwork in comparison to other structures. The downside is that you can become personally in debt when your business is in debt. If the business fails, debt can be met from your personal wealth. You are wholly liable, and you put your own personal and family finance at risk.
A limited company is one you register with Companies House as the director of the organisation, and the organisation’s financial responsibilities are of the company, separate to your own personal finances. This means that you (and any other company directors) are not personally responsible for any business debts. Private limited companies (Ltd) are the most common. Public limited companies (Plc) tend to be larger companies that are listed on the stock exchange.
With ordinary business partnerships, the responsibility of the business is personally shared between you and your business partner/s, with each partner paying tax on their share of the profits. It’s worth noting that your business partner can be a limited company, as a “legal person” as opposed to an actual person. Ordinary partnerships could be seen as an extension of the sole trader structure, with the benefit of sharing the responsibility with a partner or partners.
Limited partnerships are slightly different. Profits are shared between partners, with each partner paying tax on their share. Debt is split among partners, with general partners personally liable for all the partnerships’ debts and “limited” partners liable for up to the amount that they initially invested. With limited liability partnerships (LLP), partners are not personally liable for the business’ debts, and liability is limited to the amount which they initially invested.