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Start-up Business: Choosing a Legal Structure

Start-up Business: Choosing a Legal Structure

Starting a new business is an exciting and busy time for even the most experienced entrepreneurs. However, one of the most important steps any new start-up faces is choosing the legal structure for their new venture before trading begins.

Business Structure Options

The four most common business structures adopted by trading companies include:

  • Sole trader
  • Partnership
  • Limited company
  • Limited liability partnership

We’re taking you through some important considerations, and the pros and cons of each structure, so you can ensure your business gets off to a flying start.

Sole trader

A sole trader is an individual who is not a separate entity from their business. Whilst they may have a trading name in the eyes of the law, a sole trader and their business are one and the same. Registering as a sole trader is the simplest format that a person can trade under, as they only need to submit a self assessment return to HMRC to inform them of their income. There’s also a lot less public domain information held about a sole trader, meaning that it is more difficult to find trading results and ownership of the business.

While registering as a sole trader is a relatively simple process, there are some negatives to consider. The owner and business are one entity from a legal perspective, meaning any debts to the business are debts to the owner – and creditors are well within their rights to recover value from the owners personal assets – so your personal life is as stake too.

Partnership

Partnerships are very similar to a sole trader, with the exception that there are two or more participants. The individual partners each have to submit annual self assessment returns, declaring their share of the business’s profits.

However, similarly to the sole trader structure, there’s no distinction between the business and the partners – meaning creditors can secure payment of debts from the partners of the business personally. In addition to individual self assessment returns being submitted, the partnership must also submit a return to HMRC, stating its profits and how these are shared between the partners.

Limited Company

So called as it offers the company’s owners limited liability – if a limited company cannot meet its debts, the owners of the business cannot be pursued personally. There are, however, a few exceptions to this, such as if the director(s) have committed a fraud. Limited companies also benefit from tax advantages with this structure, as the shareholders are paid dividends which are not liable to national insurance. The dividends paid to the shareholders must, however, be paid in the same proportion of each individual’s shareholding.

One downside is that the filing commitments of a limited company are more cumbersome than the other structures, requiring more paperwork. Each shareholder and director must complete a self assessment return, while the company must file its accounts and an annual return at Companies House. A Corporation Tax return must also be filed with HMRC showing the amount of tax to be paid.

Limited Liability Partnerships

A combination of a partnership and limited company, this hybrid structure affords the partners limited liability, whilst having to submit the accounts to Companies House. Generally speaking, limited liability partnerships are the most uncommonly used out of all legal business structures.

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Still unsure? We recommend you seek the advice of a professional accountant to discuss the various options available before deciding how to structure your future business. As professional accountants in Newcastle upon Tyne, we offer accountancy services and advice to SMEs across the region.

From basic accounting to managing your payroll, we can offer a wide range of services tailored to your business’s needs – providing the ultimate accounting solution. Contact us on 0191 4063525 to find out more.

Rob Winder

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