When looking to start a business you must choose what structure of the business you’ll use. This is an important decision as it determines the legal responsibilities that you will have.
These include:
- To get started; the paperwork that you have to fill in
- Taxes that you’ll manage and pay
- When your business makes a profit; how you can take from that
- Your business makes a loss, what responsibilities you have
Once you have started your business you can change the structure, if you as the owner feel that a new structure will suit you better. In fact, it is not uncommon for businesses to start out as sole traders and then switch to become limited companies.
Sole Trader
If you’ve made the decision to start up your own business, you’re automatically classed as a sole trader. The main aspect of being a sole trader is that you run your own business as an individual and you can take whatever profit the business makes for yourself (after taxes). You can also employ staff; being a sole trader doesn’t mean you have to work alone – you are still responsible for everything so if your business makes a loss, you must personally account for that. If under unfortunate circumstances your business goes into debt, your personal assets will be at risk.
Limited Company
A limited company differs in the sense that you set up an organisation to run your business. The company’s finances are then independent of your own finances, any profit made by the company it owns and after corporation tax; profits can be shared. The company has ‘members’ who all have shares within the company, the director may have shares within the company but this isn’t always the case. It is possible to start a business as a limited company, reducing risk to personal assets and it does give the illusion of a larger company.
Partnerships
A partnership works where an individual shares all business responsibilities with their partner. All profits can be shared between the two or more partners and they must all pay tax based on their own take of the profit. The partners are still responsible for losses the business makes and any expenditure such as stock or equipment. A partner doesn’t have to be an actual person, e.g. a limited company technically counts as a legal person and can be classed as a business partner.
It is always important to understand that, your business structure has a massive influence on your finances, so it’s important to see what structure fits your business and don’t be afraid to switch if you feel you’ve outgrown one structure.
Need any more information?
If you wish to know more about which company structure works best for you, contact us.
You can call 01623 490 120 or email