The structure you select when you first launch your business has an impact on how it runs, how much tax you pay, how you pay it, and even how you register it with HMRC. Every business structure has advantages and disadvantages, therefore the ideal option to set up your new venture will rely on your specific situation. This article examines the various kinds of operational structures that are accessible and the factors to take into account for each.

A business structure: what is it?

A business’s legal status can be categorized using its structure. Operating as a sole trader, for instance, eliminates any legal separation between your personal and commercial identities. In contrast, a limited company is a distinct legal entity unto itself. This is significant because, in the event that something goes wrong and the firm is unable to pay its debts, these various forms of structures provide differing degrees of protection for your personal resources.

Check out: Important recommendations for starting a Business

Which kind of business structure indicates that I work for myself?

Working for yourself is what it means to be self-employed. You can start any kind of business and still be your own boss because it’s not a legal framework. The idea is the same if you choose to purchase a franchise. Although you will be a franchisee, you will still need to select a legal structure when you register the firm because this is not the same as a franchise for tax purposes.

Which kinds of business structures are available?

When starting a business in the UK, you have a variety of legal structure options to select from, including:

One-person business
Limited business
Collaboration
Partnership with Limited Liability (LLP)

The process of choosing a legal structure might be intimidating because it’s frequently the first significant choice an entrepreneur takes for their new startup company. We describe how to run a business using each of these structures and provide links to additional resources. Is it possible to switch between different types of corporate structures?

You certainly can! Changing from one form of building to another is a highly regular practice. For instance, starting your own firm as a sole proprietor and then converting it to a limited company. Just make sure you follow the right procedures so that HMRC and everyone else are aware of what’s going on.

What does being a sole proprietor mean?

Being a single trader entails having complete control over your company and being its only owner. Operating as a sole trader implies that there is no legal separation between you as an individual and you as a business, which raises some crucial issues:

• After paying taxes and national insurance, you are free to keep all of your earnings.
• You have personal responsibility (or “liable”) for any debts the company accrues.

Since registering is quick and simple and the administrative procedures are typically less complicated, operating your firm as a sole trader is frequently the most basic approach to get started. However, it may not be appropriate for all entrepreneurs.

Being held personally responsible for any business obligations, for instance, puts your home and other assets at danger in the event that the company is unable to make its payments. Because sole traders are taxed differently than directors of limited companies, some business owners also believe that operating under a different business form is more tax effective.

How can I launch a firm as a sole proprietor?

Anyone can become a lone trader, but if your total self-employment income is less than the £1,000 Trading Allowance in a given tax year, you won’t have to report your business to HMRC. You must register your sole proprietorship for taxes if your self-employed income exceeds this threshold.

Unlike limited corporations, sole traders are exempt from corporations House registration requirements; nevertheless, they must inform HMRC that they are registering for Self-Assessment as a lone trader.

Limited businesses

By choosing to operate your firm as a private limited company, you are separating your company from yourself as the owner or director, which are two different things.

Although this division safeguards your personal assets in the event that the firm is unable to pay its debts, it also means that any profits made by the business are owned by the company, so you will need to think carefully about how you will pay yourself.

Can a limited business be registered?

A widespread misperception is that in order to start a limited company, you need other individuals and a certain amount of money. However, private limited corporations are different, and anyone can form a private company on their own. This is true if you’re starting a public firm. Incorporation is the process of registering the firm with Companies House.

Check out: How to Register a Limited Company in the UK: A Step-by-Step Guide

Collaborations

You and one or more partners form a general partnership to conduct business together. Because the partnership will be registered as a business with HMRC, it is more formal than simply agreeing to collaborate.

Individuals, limited companies, or even other partnerships might be partners. You share the risks as well as the profits since each partner is held accountable for everything that occurs in the partnership.

Although partnerships are not taxed as an entity, they are required to file tax returns to report their revenues to HMRC. Instead, depending on the type of business structure they use, each partner must file their own tax return to report their portion of the income and then pay taxes on it. Each partner must file their own tax return and pay taxes on their portion of the profits.

As a sole proprietor, for instance, an individual partner will file a self-assessment tax return. On its corporate tax return, a limited company partner will include their portion of the partnership’s profits.

How can a partnership be established?

One of the partners must serve as the “nominated partner,” and the partnership must decide on a name under which to conduct business. This individual is in charge of handling the partnership’s legal administration, which includes filing its tax returns and registering the partnership with HMRC.

Additionally, every partner must register as a partner in the partnership (try saying that quickly three times!).

Generally speaking, it is a good idea to put the partnership agreement in writing. This regulates expectations, lays out a procedure in the event that someone wishes to withdraw from the partnership, and clarifies how the earnings are to be divided.

Read also: How do I hire my first employee?

Partnerships with limited liability (LLP)

A limited liability partnership (LLP) restricts how much each member can be held accountable for whatever debts the company accrues. An LLP restricts its members’ liability to the amount they invest or personally guarantee against loans, as opposed to a lone trader or partnership, where all parties are fully liable for any obligations.

LLPs are required to register at Companies House, in contrast to regular partnerships. At least two partners must be “designated members,” who are in charge of filing partnership account information.

In addition, each partner is required to register with HMRC as a self-employed individual and pay taxes on their business revenue.

As with other business partnerships, it’s a good idea to draft a partnership agreement that specifies who is in charge of what and how earnings will be divided.

Read Gov.uk article on choosing the right business structure here.