As A New Businesses Should I Operate As A Sole Trader, Partnership, Limited Company Or LLP?

As a new businesses should I operate as a sole trader, partnership, limited company or LLP?

This is the one question that all new start ups ask. I have summarized briefly the

four different structures. However, all businesses are different and a structure that is

best for one will not be suitable for another. Therefore you should always seek

professional advice at the outset.

Sole Trader

The easiest way of starting up in business is as a sole trader, and you will become

‘self employed’.

You need to inform HMRC of your intentions by registering as self employed. You

will have to complete a self assessment tax return each year. You pay income tax

and Class 2 and Class 4 National Insurance Contributions on any profits your

business makes.

Unlike the limited company structure, sole traders do not have limited liability in case

something goes wrong – any business debts you incur, will be counted as personal

debts, and your personal assets including property may be at risk.

Partnership

Two or more self employed persons or businesses may decide to work together and

set up a partnership.

As with sole traders, partnerships do not have the benefit of limited liability. The

partners will share in all aspects of the business, including profits, losses, assets and

liabilities.

If you are setting up in partnership, you should sign a partnership agreement. This

should cover important issues such as how the business will be run, how the profits

are to be split, and what happens if a dispute arises between partners.

You will need to complete a partnership self assessment tax return, and each partner

will also need to complete an individual form. Partners are taxed in the same way as

sole traders.

Limited Liability Company

A limited company may provide a more professional image for your business.

A limited company is a distinct legal entity from its directors and shareholders.

Company directors have limited liability. However, often personal guarantees are

required in order to secure business finance, and in that case there will be some

personal liabilities. You should always seek professional advice before giving

personal guarantees.

Shareholders are only liable for the amount of money they have invested in the

shares.

Limited company directors have a number of legal and financial obligations to meet,

with strict deadlines. These include filing an Annual Return and accounts with

Companies House

You will be liable to pay Corporation Tax on any profits the company makes, and

have to complete a corporation tax return form. A director also has to complete a

self assessment tax return form.

Limited Liability Partnership (LLP)

A limited liability partnership is a relatively new concept and is not widely used.

An LLP shares some elements of both the limited company, and the partnership

model.

The LLP is a distinct legal entity, like a limited company, and is governed by

Companies House.

In order to form an LLP, there must be a minimum of two members, which can be

individuals or businesses.

A Deed of Partnership should be signed and this should outline how the LLP is to be

run, and detail the roles and responsibilities of its members.

The LLP model is relatively flexible, and members are taxed through self

assessment.

For further information or advice please call us on 0151 645 5656