Business Structures – Which Should I Use?

At AHACCOUNTANTS, we understand that choosing the right business structure is a crucial decision when starting your own enterprise. This choice carries significant tax and legal implications, and our team can help you navigate the options available if you’re starting or have recently started a business in the Nottingham area.

Once you’ve decided to be your own boss, it’s essential to determine the most suitable legal and taxation structure for your business. The best choice will depend on your personal circumstances and future plans, as it impacts how you will be taxed, your exposure to creditors, and other important matters.

Possible Business Structures

1. Sole Trader
   Operating as a sole trader is the simplest trading option, requiring minimal formalities. The most important step is informing HMRC. As a sole trader, you must keep business records to calculate profits each year, which will form the basis for your tax and national insurance payments. All profits generated belong to you. However, as a sole trader, your business is not legally separate from your personal affairs, meaning you are personally liable for all business debts.
2. Partnership
   A partnership extends the concept of a sole trader, allowing two or more people to pool their talents, clients, and resources to build a more successful business collectively. Partners share profits according to a pre-determined agreement. It’s advisable to draft a Partnership Agreement to outline the working relationship. Partners are taxed similarly to sole traders, but only on their share of the profits. All partners are jointly and severally liable for partnership debts, meaning if one partner cannot pay their share, the remaining partners may be held responsible.
3. Limited Company
   A limited company is a separate legal entity from its owners, capable of trading, owning assets, and incurring liabilities independently. Ownership is represented through shares. If you work for the company, you can be both a shareholder and an employee. When profits are generated, they belong to the company. To extract money, you may pay yourself a salary or dividends, allowing for effective tax planning to minimize overall tax and national insurance liabilities. However, operating a limited company comes with additional administrative responsibilities, including preparing statutory accounts, fulfilling company secretarial obligations, and managing PAYE (Pay As You Earn) procedures. A key advantage is that your personal liability is limited to the amount you have invested in shares.
4. Limited Liability Partnership (LLP)
   An LLP combines the features of a company and a partnership. While it is legally similar to a company and offers limited liability to its members, it is taxed as a partnership. LLPs are suitable for medium and large partnerships, providing the limited liability and administrative obligations of a company without the tax flexibility.
5. Co-operative
   A co-operative is a mutual organization owned by its members, often its employees. An example is the John Lewis Partnership. Co-operatives operate on the principle of mutual benefit and require specialist advice to establish and run effectively.