Should My Business Be Ltd, LLP or a Sole Trader
Should My Business Be Ltd, LLP or a Sole Trader
Advice on starting a business – What company structure should I use?
By Needle Partners
Starting a business can be a daunting prospect and one of the first decisions faced by any budding entrepreneur relates to the choice of legal structure that your business will take.
There are many different structures through which a company can operate including franchises, co-operatives, public limited companies, companies with unlimited liability and community interest companies. However, while this article does not set out an exhaustive list of all your options, the four most common business models are registering as a sole trader, forming a partnership, incorporating a limited company and incorporating a limited liability partnership (LLP).
As the name implies, a sole trader is essentially a self-employed person who is the sole owner of their business.
This is the simplest way to set up a business as you don’t need to set up a company at Companies House to run your business through (although you will need to register with HMRC so that you can file an annual tax return in respect of your business). Operating as a sole trader also gives you greater privacy than a limited company would receive as your details won’t be freely available at Companies House.
However, when you are a sole trader there is no legal distinction between you and your business. This means that you are personally liable if the business goes into debt and as such your personal assets will be under threat if things go wrong. It can also be harder to raise finance as a sole trader, as banks and other investors tend to prefer lending to limited companies and the tax rates on sole traders are often less kind as they are on limited companies.
A partnership is simply an extension of the sole trader structure whereby two or more self-employed may decide to work together. Partners in a partnership will share in all aspects of the business, including sharing in any profits that the partnership makes. However, as with sole traders, partnerships do not enjoy the benefits of limited liability, meaning that they will also share the liability between them if the company goes into debt.
If you are considering entering into a partnership, it is very important that you enter into a partnership agreement which will set out how the business is to be run, how profits will be shared and what the mechanism for resolving a dispute between the partners is should the need arise.
A limited company is a type of business structure where the company is a distinct legal entity separate from its owners (shareholders) and managers (directors). This can be the case even if the company is run by just one individual that is acting as both shareholder and director. A limited company can be limited by shares or by guarantee. Companies which are limited by guarantee are normally incorporated for non-profit making functions and so we have focused this article on companies limited by shares, as this is by far the most common form of company and constitutes the vast majority of companies incorporated in the UK. For more information on companies limited by guarantee we would recommend you speak to your solicitor or accountant.
The principle advantage of a limited company is that it is a separate legal entity and as such your personal assets aren’t exposed and you only stand to lose the amount that you have invested in shares in the company. Directors also have limited liability, although if you provide a personal guarantee in order to secure business finance, there will be some personal liability against you. Furthermore, limited companies do not pay income tax and instead pay corporation tax on their profits. This is a kinder rate of tax and there is also a wider range of tax relief available to you. Finally, a limited company may provide a more professional image for your business.
However, running a limited company brings added responsibilities which can be costly and time consuming. Directors have responsibilities in the form of directors’ fiduciary duties which outline what a limited company’s director must do legally, this includes filing accounts and annual confirmation statements at Companies House and creating a payroll for employees (even if you are the sole director and shareholder). These required filings at Companies House also mean that the details of your directors and company earnings will be public information which may not appeal to you.
Limited Liability Partnership (LLP)
An LLP combines elements of both a limited company and a partnership. As with a limited company, an LLP is a distinct legal entity and therefore you are only liable for the amount of money you have invested. Similarly, an LLP is governed by Companies House and is subject to the same requirements in this regard as a limited company. On the other hand, as with a partnership, an LLP must have two or more partners at all times, members of an LLP are taxed directly via the self-assessment route and are governed by a Deed of Partnership which outline how an LLP is to be run.
Ultimately, there are no rules in determining which business structure you should use for your start-up and the structure that you do ultimately choose will impact on everything from your profits to the amount of your paperwork. It is therefore important not to rush into any decision and to carefully consider what would be most suitable for the business venture that you have in mind.
For more information and help, please contact Needle Partners Limited.