Starting your own business is an exciting and challenging time, it becomes even more challenging when you are deciding how to structure your business. While you may have the most amazing ideas, people and products; it can be incredibly difficult to decide how best to pull it all together under one formal banner.
This guide takes you through the types of business structure and why you might wish to consider them. It should inform you of the pros and cons of each and after reading you should have a clearer idea about how best to structure your business.
Becoming a sole trader can be an attractive prospect, primarily because there are many tax advantages that can be used to reduce costs at the end of each tax year. As a sole trader you don’t have to go through the red tape of registering a business. You can reap the rewards of running your own business in your own name instead.
This means that in January of each year, you would file a tax return, deducting any allowable expenses from your own personal income. What’s more, you can even deduct costs of running the business from your personal income tax.
Being a sole trader does come with draw backs however. As a sole trader any debt the business accrues will become your personal responsibility to pay. The are no get out of jail free cards as a sole trader, the buck stops and firmly rests with you. Your responsibility and accountability for your business actions are therefore increased over other company structures.
Registering a LTD Company
This is a far more structured way of starting a company. You will need to register a company name, complete the details of parties involved and pay a fee to Company’s House for the privilege of registering your company. Click here for more information on registering your company.
Being a limited company again has positive aspects, you can separate your business and personal income, pay yourself dividends and remove directors from the board in instances where the business changes. If you have employees, this structure is probably most suited as it is required for most official avenues like worker pension schemes.
If your company makes losses, it won’t necessarily affect your personal income, for example; a LTD company can register a loss but still pay director’s and employee’s salaries. If your company borrows money, you will not be personally responsible for the money owed except up to the value of the shares in the company.
Downsides of a LTD company are that they are not straightforward to set up, and once registered they need to be maintained according to official guidelines.
Limited Liability Partnerships
A third and rare way of setting up a company is by setting up a limited liability partnership or LLP. Primarily used by legal and medical professions, each partner buys into the company and is liable to only to an allotted amount of any company debt.
These arrangements are beneficial if in the future the company wishes to raise capital by introducing new partners. Drawbacks of this arrangement are again the red tape in order to set up the company and there are fewer tax benefits than if the company was registered as a limited company.
PLC (Public Limited Company)
It is extremely rare that a new business will set up as a PLC. This is mainly for the reason that the value of the company dictates its structure, and many start-up companies have no intrinsic value immediately.
Public limited companies sell their shares to the public and will often have a majority shareholder or a board of directors. A great advantage a PLC has over other company structures is that in the event of financial difficulty they can raise capital quickly by making more company shares available. This improved cashflow in times of need can be a lifeline for companies without the need for borrowing.
A PLC has to pay shareholders dividends however, so you should be cautious before choosing this company structure, especially if first year profits are important for growth in subsequent years.
A business structure that is becoming more prevalent is business partnerships whereby two or more sole traders create a company structure by way of contract. These can be complex or very simple arrangements and mainly follow the same rules and guidelines as the sole trader option with the exception of any clauses in the agreements set up by the partners.
Hopefully by now you will have a better understanding of company structures and which one will suit your business requirements. There are plenty of resources available online so if you want to clarify the information further on any of the structures mentioned you should have no difficulty in doing so.