Latest article from Burton Sweet’s Rachel Finch.

Burton Sweet

Choosing the right business structure

One of the most important questions that every business owner should ask themselves is ‘am I in the right business structure?’ Too many people choose the wrong structure from the start, or simply do not review the situation as their business grows. What was right on day one is rarely right 10 years down the line.

There are 3 main alternatives which you need to consider, at the start and at regular intervals thereafter. Should you be a sole trader? Operate as a partnership? Or is a limited company the right choice for you?

In choosing the best business structure, commercial and family considerations must be weighed up alongside the comparative tax positions. The best structure for you and your business may not necessarily be the most tax efficient.

Sole Trader
Running your business as a sole trader offers the simplest legal structure and often the most flexible. Accounts and record keeping are relatively straightforward, and your profits are declared annually on your tax return. After paying your tax and National Insurance the money left is yours to spend freely. If you decide to stop trading you simply notify HM Revenue and Customs and complete a final tax return.

However, as a Sole Trader you are liable for all debts of the business to the full extent of your personal assets, leaving potential exposure to bankruptcy if things go wrong.

Partnerships share the burden of ownership, allowing two or more people to set up in business together. They are run in a very similar way to sole traders, the main difference being that profits and losses are shared between the partners in an agreed ratio. Again, after the partners pay their individual tax and National Insurance liabilities the profits left over are theirs to spend as they wish.

As with Sole Traders, the partners are liable for all debts of the business to the full extent of personal assets, if things go wrong.

Limited Company
The third option, and one which, in my experience, too many business owners choose without being aware of the pitfalls as well as the benefits, is a Limited Company.

A limited company is a separate legal entity from its owners, and provides limited liability for its shareholders. This means that, in the majority of cases, the private assets of the owners are protected in the event that the company were to fail, which is not the case with sole traders or partnerships. However, lenders and landlords can sometimes ask for personal guarantees in respect of the company’s obligations which can reduce the benefits of this.

Limited Companies are often perceived as being more tax efficient, however if you need to draw out all of the profit that the business makes to cover your personal living expenses then this is not necessarily the case.

There are major compliance requirements with running a limited company – accounts must be filed at Companies House which means they are freely available for the public to see, and the costs of running a company are far greater than a sole trader or partnership.

The best advice I can give is to review the structure that you trade through on a regular basis to make sure that it is the best one for you. Tax should not be the main factor in the decision that you make, the commercial realities of your business and your need for access to the profits should always be considered in priority.

Rachel Finch is the Tax Advisory Partner at Burton Sweet Chartered Accountants and Business Advisors. She specialises in providing advice to business owners and individuals on a wide range of issues from Income Tax and Corporate Tax through to International Tax and Corporate restructuring.

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