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How to choose a business structure

You’ve had a great idea for a new business, you’ve done your market research and identified a gap in the market – now, it’s time to think about registering your company. But before you do that, you’ll need to settle on a business organisational structure. There are many types of business structures, and it helps to have a full understanding of what they mean before making a commitment. Find out how to choose a business structure and more.

What is a business structure?

So, what is a business structure? Very simply, a business structure refers to the organisational structure of the company in terms of its legal status. It determines the legal obligations of your business, including the amount of tax you need to pay and the level of personal responsibility you’ll hold if the business incurs a loss. There are a broad range of business structures, including offshore companies, franchises, and community interest companies, but we’re going to focus on the three most common business organisational structures: sole traders, partnerships, and limited companies.

Sole trader

Sole traders are essentially self-employed. If you register as a sole trader, you’ll be responsible for running the business and meeting any legal requirements. You will keep all the business’s post-tax profits, but you’ll also be personally responsible for any debts that the business incurs. While a sole trader can employ other people, you’ll still be solely responsible for the business.

These types of business structures are simple to set up, involving a relatively small amount of admin. All you need to do is register with HM Revenue & Customs (HMRC) for self-assessment before you begin trading. However, as there’s no separation between your finances and the business’s finances, there’s also an element of financial risk. If you expect the business to grow or incur any debt, choosing a different business organisational structure may be a good idea.

Partnership

Partnerships are a type of business structure where two or more people will share equal responsibility for the business. Profits from the business are shared, and each partner will pay tax on their respective shares. Legally speaking, a partnership is like a sole trader in the sense that all partners are liable for the debts of the company. However, these debts may be divided between all the partners.

Before registering as a partnership, you’ll need to choose a name and select a ‘nominated partner’ who is responsible for managing your business’s records and filing your tax returns. You’ll also need to register with HM Revenue and Customs (HMRC). Before you set up the company, it’s important to write up a partnership agreement document, outlining the ownership, liabilities, and guidelines around splitting profits.

Limited companies

Unlike sole traders and partnerships, limited companies are separate legal entities. This means that although you’ll be responsible for the business itself, you won’t bear any personal responsibility for debts or other legal liabilities if the business runs into trouble. However, limited companies do have greater administrative requirements around reporting and management that you’ll have to pay attention to. For example, you’ll need to:

  • Inform shareholders if you stand to personally benefit from a company transaction

  • Pay Corporation Tax

  • Keep records and report changes

  • Follow company rules outlined in its articles of association

  • File your accounts and Company Tax Return

Setting up a limited company is a little more complicated than setting up other types of business structures. You’ll need to choose a company secretary and directors, select guarantors and shareholders, identify people with significant control (PSC) over the company, prepare a memorandum of association and articles of association, and register the company with Companies House.

Choosing a business structure

When choosing a business structure, it’s important to have a full understanding of the risks and benefits associated with each one before making your overall decision. Work out which business organisational structure works best for you, discuss with colleagues (and your accountant, lawyer, etc.), and then go ahead and get started.

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