Starting in business

Forms of business organisation

Getting off to a good start

We offer an initial consultation, without charge, to help you clarify you plans and get your administration and tax reporting off to a good start. One of the issues we would discuss it the appropriate form of business organisation.

The choice of business organisation

An individual can be in business as a sole trader or as a limited company.

The three main types of organisation for people in business together are the partnership, the limited company and the limited liability partnership (LLP). So far not many businesses have chosen to trade as an LLP but we think that these will eventually become popular, as they are in other countries.

One person organisations

Sole trader

A sole trader is simply an individual in business for himself. He is fully responsible for the business and its debts. He pays tax and national insurance contributions on his profit. A sole trader is useful when:

• Simplicity and low cost is important. You just register with the tax office within three months to pay the class 2 (fixed weekly rate) of national insurance contributions.
• You prefer privacy. The public cannot inspect your accounts.

Limited company

The company and the owner are separate persons and each pay tax. This structure is suitable when:

• There are risks for which insurance is not available.
• Some owners or investors are not involved in management.
• You are making a reasonable level of profit or a large part of the profit is retained for investment.
• An image is important.

But

• Formalities must be followed and there are some administrative expenses.
• It is difficult and expensive to arrange shareholdings for staff or to bring in partners at a later date.

When sharing the business with another person

Partnership

Two or more people in business together. A partnership is useful when:

• Flexibility is important. You can easily change the membership or profit sharing arrangements.
• There is low commercial risk or risk capable of being covered by insurance.
• Most of the profit will be drawn out of the business.
• It is a small venture where low administrative costs are important.

But

• It can be tax inefficient if a significant part of the profit has to be kept in the business to pay off debts or finance expansion.
• For little extra cost an LLP could be used.

Limited liability partnership

These organisations are companies for company law purposes, but are taxed as partnerships. They are suitable when:

• There are risks for which insurance is not available.
• You need flexibility to easily change the membership or profit sharing arrangements.
• Most of the profit will be drawn out of the business.

But

• They are unfamiliar, though many professional partnerships have now converted to an LLP.
• The taxation burden may be high if a large part of the profit is retained to finance expansion.

Limited company

See above for the main features, but when owned by more than one person:

It is difficult and expensive to re-arrange the ownership to change the profit sharing or to introduce new owners or to deal with resignations.

Common to all businesses

All businesses must show some information on ALL business letters, emails and purchase orders.

A sole trader or partnership must show the name of the owner (or the names of all the partners) and the address of the main place of business.

A limited company or limited liability partnership must show:

• The full name as registered at companies house.
• Place of registration, normally - Registered in England and Wales.
• The registered number.
• Registered office address.
• In the case of an LLP, the fact that it is a limited liability partnership.