Types of Businesses
If you decide to start a business, there are many different types of business structures you can choose from, such as becoming a sole trader, forming a partnership, becoming a limited company or perhaps a limited liability partnership. This article outlines:
- The differences between each type of company set up.
- The advantages and disadvantages of each type.
Sole Trader
Is where one individual run’s and owns the entire business. The sole trader is one in the same with the business and keeps all the profits after taxes. A sole trader needs to submit a self-assessment tax return each year to declare the profits and pay their taxes.
Advantages:
- Easy to set up.
- The sole trader makes all the decisions in the business.
- Complete flexibility and control.
Disadvantages:
- Unlimited liability, meaning that the sole trader is responsible for whatever debt accrued within a business.
- No cover for holidays, sickness etc.
Partnership
A partnership is similar in structure to a sole trader; however, it is with two or more people as partners. A self-assessment tax return is completed at the end of the tax year for the partnership, then these profits/losses are split between the partners in their individual tax returns.
Advantages:
- Another person to help with raising capital, management etc.
- Cover for holidays and sickness.
- Additional expertise and Knowledge by working with others
Disadvantages:
- Potential conflict between partners.
- Unlimited liability – however shared between the partners.
Partnership agreements are strongly recommended however are not legal. This is an agreement between the partners which includes items such as how the profits are shared amongst the partners
Limited Liability Partnership (LLP)
This is a partnership where the partners have limited liabilities depending on the amount they put into the business, so the business has aspects of a limited company.
The advantage of a LLP is the limited liability, meaning that the owners’ assets and private investments are not at risk. There is also tax benefits as profits can be distributed through dividends rather than salaries. The effect of paying dividends vs paying through PAYE will be covered in a separate article.
Financial accounts have to be submitted to Companies House for the public record so there is public disclosure, which could be seen as a disadvantage of a LLP. The effect this has is the public are able to see the accounts, unlike a partnership or sole trader.
Limited Company
A limited company is a business which is incorporated at Companies House. The company is a separate legal entity to the director/shareholder. Limited companies need to submit annual statutory accounts to HMRC and Companies House each year.
Advantages include:
- Limited liability meaning personal assets are not always are risk
- Lower Taxation if effective tax planning has taken place
- Company pension provision
- Higher business profile encouraging other companies to work with you
Disadvantages:
- Higher set up costs
- Accountancy costs and requirements
- More public visibility
A limited company can also be private or public. Private companies are owned privately by founders and private investors, whereas public companies are on the stock exchange where the shares can be owned by members of the public.
Footnote:
LLP & LTD:
The Limited Liability offers the directors and partners of the business protection only if the directors have performed their duties in line with the relevant companies act and have not been involved in illegal activities in the business.
Useful Link: Setting Up a Business Gov
By Katherine
