Structure your Business for Success

Running your business as a sole trader means that you work on a self-employed basis.  One misconception is that you cannot employ staff as a sole trader but this isn’t the case, you do however need to register appropriately with HMRC as an employer.

Setting your business up as a sole trader is straightforward and cost effective which is why it is often used by smaller and start-up businesses.  It means that you retain all of your business profits after tax, with no upper limit on the amount you can earn, although you do need to be mindful of higher rate tax bands.

To set up a sole trader business you need to inform HMRC of your business status and register for self-assessment tax.  You will be responsible for the completion of tax returns and the correct payment of tax and National Insurance.

One of the main downsides to operating your business as a sole trader is that you and the business are seen as the same entity making you personally liable for any business losses, debts or negligence.

The pros and cons of setting your business up as a sole trader are:

Pros

• Simple to set up and low cost.
• Low level of administration responsibility – completion of a self-assessment tax return.
• Retain all business profits (after tax deductions) with no upper limit on what you can earn.

Cons

• You are viewed as the same entity as the business increasing your risk.  You would be personally liable for business losses, debts and negligence.

Running your business as a business partnership has very similar requirements to that of working as a sole trader with the benefit of having one or more business partners to share the load.  It is therefore used when one or more individuals come together formally to run a business.

In order to create a business partnership you must have a signed agreement detailing the partnership and in particular outlining the agreed share of profits, losses, liabilities and level of ownership between you.  It should also include instructions on what will happen in the event of one of the partners wishing to exit the business.

You are also required to register the partnership name and status with HMRC.  Each individual partner must also register as self-employed and complete self-assessment tax returns in relation to any Tax and National Insurance contributions owing.

As with a sole trader business the individual partners and partnership are seen as one entity with each partner being liable for any business losses, debts or negligence.

The pros and cons of setting up you business as a partnership are:

Pros

• Easy to set up and more cost effective than a Limited Company
• Ability to work with / have another business owner for support in running a business.

Cons

• Increased personal risk as each partner is liable for business losses, debts as well as any negligence on the part of any partner.
• There can often be disputes around workload versus share of profits if not deemed as equitable or clearly agreed at outset.

Setting your business up as a private limited company is more complex and costly because of the additional administrative and legal requirements, however it does give more protection as the business is seen as a separate legal entity reducing your personal liability.

When setting up a limited company there must be an appointed Director (or board of Directors) who manages the business alongside any shareholders.  It is possible to register as a limited company if you are the only person working in the business, you would simply be the appointed Director.

To set up the business you must first decide on a company name and register it on Companies House.  The appointed Director is responsible for completing the administration, including an annual audit, and filing of company accounts with both HMRC and Companies House at the end of each financial year.

The business has its own legal entity and is subject to Corporation Tax which is paid on all business profits.

The pros and cons of setting up your business as a limited company are:

Pros

• As you and the business are seen as separate entities you are better protected and only liable for what you have invested in the company.
• Having a limited company rather than working as a sole trader can enhance your reputation with potential customers and suppliers.
• Corporation Tax can be more efficient that higher rate income tax as a sole trader.

Cons

• Setting up a limited company is more complex and costly.
• There is a greater administrative and legal burden on the Director of the business.

Setting your business up as a Limited Liability Partnership (LLP) is similar to that of a partnership but it provides greater protection for the partners.

As with a limited company, an LLP ensures that liability to the partners is limited to whatever they have invested into the business, so each partner is not liable for any negligence on the part of other partners.

At least two partners must be named in the partnership agreement to report on your end of year accounts and keep up to date with general administration.  The partnership must be registered on Companies House, registered for Corporation Tax, and be notified to HMRC (similar to a limited company).

As with a partnership, an LLP must have an agreement in place that outlines partner responsibilities including the share of business profits. Each individual partner must register as self employed and complete their own self-assessment tax return in respect of Tax and National Insurance payable on their income (such as their salary or dividends) from the business.

The pros and cons of setting up your business as an LLP are:

Pros

• Greater protection from partner liability and losses
• Corporation Tax can be more tax efficient than higher rate income tax

Cons

• More complex and costly than a normal partnership
• Increased administration and legal responsibility for 2 of the partners