Choosing a business structure

The choice between sole trader, company and LLP

Getting off to a good start

We offer a free initial consultation 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). Many professional firms now trade as an LLP and they are slowly becoming more popular for other businesses.

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.
• You are making a reasonable level of profit or a large part of the profit is retained for investment.
• An image is important.
• You may have an investor who is not involved in management.

But

• Some formalities must be followed, there are some administrative expenses and a summary of your accounts will be available for inspection at Companies House.
• 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

A partnership was a traditional way for two or more people to work together. Nowadays, unless the business is planned to last for only a short time, an LLP is usually better.

Limited liability partnership

These organisations are companies for company law purposes and file accounts at Companies House. However, they are partnerships for tax purposes. They file a partnership return with HMRC and each partner pays personal taxation on their share of the partnership profit. An LLP is 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.

All businesses

All businesses must disclose some details about themselves on business letters, emails, purchase orders and on their website. We have a handout explaining the requirements.