Which Business Structure Should You Use
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This helpsheet gives you an outline of the different business structures you
can trade through. Your business format is not set in stone forever and you can
change between them. It is fairly simple for a sole trader to take on a partner
and become a partnership and for a partnership to become a Limited Company.
There are however more complications with changing from a Limited Company to a
sole trader or partnership.
This is the simplest form of business to start where you carry on business on
your own account. You are liable to income tax and Class 4 National Insurance on
your profits. You can employ people including your spouse, as long as they are
paid only for the value of work actually performed.
A partnership is two or more people carrying on business together with a view
to making profit, although partnerships can also be formed between companies, or
between an individual and a company.
The partners in a general partnership are all joint and severally liable for
partnership debts, although this does not apply to personal tax bills based on
It is advisable to have a partnership agreement to document the business
arrangement between the partners, including how profits will be shared and how
partners will join and leave the partnership. Even a husband and wife
partnership should have a written partnership agreement, as this can be used to
show the Revenue that both parties are actively involved in the business and
have a right to share the profits.
A limited company is a separate legal entity from its owners. These are the
- The business is owned by the limited company, not you.
- The company must have at least one shareholder.
- It must also have at least one director and one company secretary but
these posts cannot be held by the same person. Company law is changing so that
in future small companies will not be required to have a company secretary.
- The shareholders do not have to be directors. Directors are treated as
employees of the company, but they do not have to draw a salary from the
- If you are the only shareholder, you will have sole ownership of the
company, and are likely to also be the director who runs it.
- The company pays corporation tax on its profits.
- The company is governed by company law.
Main advantages of using a Limited Company…
- A Limited Company may appear more credible and substantial although in
reality this is not necessarily the case.
- The liability of its shareholders is limited to the amount of the share
capital issued and so offers protection to the shareholders’ personal assets.
In the event of company failure and not being able to pay its creditors, your
personal assets are protected. However, banks, landlords and others will often
require personal guarantees from the shareholders or directors when dealing
with small limited companies.
- A Limited Company has better borrowing potential than an unincorporated
business as it can use current assets as security by creating a floating
charge over its assets.
- You can use shares to enable different people to hold different
proportions of ownership of the business that they can pass onto the next
- You can have different classes of shares with different rights, such as
non-voting shares for someone who wants to invest some money into the company
but doesn’t wish to take part in the management.
- Having a limited company can create significant tax advantages by having
profits taxed at Corporation Tax rates which are a lot lower than the higher
rates of personal tax. However when the funds are extracted from the company
extra tax or national insurance charges may arise.
Main disadvantages of using a Limited Company…
- Your annual accounts have to be filed at Companies House and are available
for public inspection as is other information about the company.
- Directors are personally subject to regulations and can be fined or found
guilty of a criminal offence for failing to comply.
- A company is more complicated to wind up.
- Generally involves higher accountancy fees as there is paper work to deal
- Any losses made by the company cannot be used against the owner’s other
Limited Liability Partnership (LLP)
LLP’s are treated like a normal partnership for tax purposes but the members
of the partnership have the protection of Limited Liability.
A LLP is a separate legal entity and can enter into contracts and deeds, sue
and be sued in its own name. With normal partnerships every partner has to be
party to certain documents and litigation.
Floating charges can be granted over its assets in its own name, which normal
partnerships can’t do. As with Limited Companies, the LLP must file annual
accounts at Companies House together with certain other information.
The best business structures are those that are as flexible as possible. A
new business that is likely to make losses in the first few years could start as
a partnership or sole-trader to make the best use of those losses. There may be
commercial pressures to operate as a limited company in certain sectors. It is
possible to split a business into two; one part running as a Limited Company and
one as a sole trader/partnership to get the best of both structures. However,
the VAT implications of such a split must be considered carefully. You can even
structure the business as a partnership but with one of the partners being a
About the Author
Jonathan Amponsah BSc FCCA is a UK Tax Expert and the founding partner of
A M P Associates –
A specialist firm of chartered certified accountants and tax advisers based in
London and Surrey. Jonathan advises on a wide range of business and tax issues
and he is recognized for his proactive and innovative approach to taxation.
Jonathan can be contacted on 0845 009 8845 or email:email@example.com
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Article Published/Sorted/Amended on Scopulus 2008-04-10 10:13:39 in Business Articles