Do you know which Structure your business Should Take?
18/05/2021 - Whitley Morgan Ltd
Whether you decide to become a sole-trader, partnership, or limited company – each structure has its advantages and disadvantages, let’s take a look:
Sole Trader / Partnership vs Limited Company – Who is Who?
A Partnership is simply one or more sole-traders working together – the main thing to remember is that the individuals involved with a partnership are ‘joint and severally liable’ – just as they would be as a sole-trader.
Having a Partnership agreement is a must or consider being limited as a better option and more protection for the owners.
A Sole Trader means you are the business – there is no distinction between the two. Any business debts become your debts (including your house, which is not protected).
A limited company is a legal identity in its own right. So as a shareholder (the owners of the company) your liability is limited. Liability means that any debts are the responsibility of the company to pay – not the owners.
If there is more than one Shareholder, having (like a partnership agreement) a Shareholder Agreement can be a vital tool in your toolbox. It may never be used, but when/if you do ever need it, you be glad to have it to refer to.
What about the tax implications?
Sole traders & Partnerships (via the individuals) pay tax on their business profits via the annual self-assessment tax return system.
With a sole trader something worth noting, if your Tax due is over £1K you may have to Pay On Account in advance of the following year. So, if your tax was £1K in January you pay £1,500 and in July £500. So £1K in advance is then taken into account in the following year’s calculations and it keeps going like that until you either make a loss or close the business.
In a limited company, tax is deducted from directors’ salaries via Pay As You Earn (PAYE) and paid at regular intervals to HM Revenue & Customs (HMRC).
Companies themselves pay Corporation Tax on their profits after paying your salary – but before your dividend distribution. Effective tax planning requires profits, salary and dividends to be considered together.
Sole traders/partners are not legally required to file annual accounts, but they still must keep a record of business expenses and income to fill in their tax returns annually.
A limited company must prepare:
- Annual accounts (also known as ‘statutory accounts’) from the company’s records at the end of the financial year. You produce full and abbreviated – the abbreviated are submitted to Companies House and HMRC. The full accounts are available with more information for the Shareholders.
- Corporation Tax Return – submitted within 12 months but paid within 9 months and 1 day – yes that does not make sense! In theory you can pay an estimated amount and the full amount when the actual return is submitted, often in reality these are done at the same time.
- A Confirmation Statement with Companies House, which includes information about the directors, shareholders, and registered office.
- You must maintain a PSC (Persons of Significant Control) register – it’s a register of anyone that has a ‘say’ over the business. So not necessarily just the shareholders / Directors. Accountants can be a PSC too.
A Limited company (whilst not guaranteeing reliability) gives the impression of a soundly based organisation and may appear more credible, especially as it is more transparent as the records are on Companies House – a public record for anyone to view.
Other areas you need to consider are:-
- National Insurance
- Legal continuity
- Transfer of ownership
- Credibility & Privacy
- Pension schemes
- Director’s responsibilities
In summary you must consider which structure is best for you based on a number of factors.
Sometimes the decision is taken out of your hands for whatever reason, but it is worth knowing these advantages and disadvantages to enable you to make an informed decision.
Sole-Traders/Partnership are much easier to administer, but it means you are liable for all debts.
A Limited Company has many rules and regulations that have to be adhered to, however the advantages of kudos and limited liability protection and (at certain profit levels) the tax savings, can outweigh the administrative burden.
How Can Whitley Morgan help you? Together with a strong financial background we are able to support you and your business, bringing your ideas to reality. With 25+ years’ experience in starting, building, growing, franchising and selling companies we provide training, advice, support and guidance to businesses either starting up or established firms that look to grow their service/product range or improve an area to help the company grow and we do this in a friendly and approachable way.
For more information please visit www.whitleymorgan.co.uk or call Tel: 01284 335562
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