The structure that you choose when you start a business affects how the business operates, the amount of tax you pay, how you pay it, and even how you register the business with HMRC.

There are pros and cons to every business structure, so choosing the best way to set up your new venture depends on your circumstances. In this article we look at the different types of operating structure that are available, and what to consider for each one.

What is a business structure?

A business structure is a way of classifying the legal status of your business. For example, operating as a sole trader means that there isn’t any legal distinction between you as an individual and you as a business. A limited company, on the other hand, is a separate legal entity in its own right.

This is important because these different types of structure offer varying levels of protection for your personal finances if something goes wrong and the business can’t pay its bills.

What type of business structure means I’m self-employed?

Being self-employed means that you work for yourself. It’s not a legal structure, and you can set up any type of business and still work for yourself.

It’s a similar principle if you decide to buy a business franchise. You’ll be a franchisee, but this isn’t the same as a legal structure for tax purposes, so you’ll still need to choose a structure when you register the business.

What different types of business structure are there?

There are several types of legal structure to choose from when you set up a business in the UK, including:

• Sole trader
• Limited company
• Partnership
• Limited Liability Partnership (LLP)

Picking a legal structure is often the first major decision an entrepreneur makes for their new start up business, so the process can seem quite daunting. We explain what it means to operate a business using each of these structures, and where you can find more information.

Can I change from one type of business structure to another?

Yes, you can! It’s very common to switch from using one type of structure to a different one. For example, becoming self-employed as a sole trader, and then later incorporating your business as a limited company. Just make sure you follow the correct procedures so that everyone (including HMRC) know what’s happening.
 

What does it mean to be a sole trader?

Being a sole trader means that you’re the sole owner of your business and in full control of it. In legal terms, operating as a sole trader means there isn’t any distinction between you as an individual and you as a business, which leads to some very important considerations:

• You can keep all the profits that you make after paying tax and National Insurance
• You’re personally responsible (or ‘liable’) for any debts that the business generates

Running your business as a sole trader is often the most straightforward way to start up because registering is quick and easy, and the administration requirements tend to be simpler. It might not be suitable for every business owner though.

For example, being personally liable for any business debts means assets such as your home might be at risk if the business can’t pay its bills. Some business owners also find it more tax efficient to operate under a different business structure, because of the way that sole traders are taxed compared to how the director of a limited company pays themselves from the business.

How do I start a sole trader business?

Anyone can become a sole trader, although you won’t need to tell HMRC about your trading if the total amount you earn from self-employment is less than the £1,000 Trading Allowance in a tax year. If your self-employed earnings are higher than this, then you’ll need to register your sole trader business for tax.

Sole traders don’t need to register with Companies House like limited companies do, but you will need to tell HMRC that you’re signing up for Self Assessment as a sole trader.

Limited companies

Deciding to run your business as a private limited company means that your business exists as a legal entity in its own right, separate to you as the owner or director (they’re different things!).

This separation protects your personal assets if the company can’t pay its bills, but it also means that any profit the business makes belongs to the company – so you’ll need to consider how you pay yourself.

Can I register a limited company?

It’s a common misconception that you need other people and a minimum amount of money to form a limited company. This is true if you’re starting a public company, but private limited companies are different and anyone can form a private company by themselves.

You’ll need to register the business with Companies House – a process known as incorporation.

Partnerships

A general partnership is where you and one or more partners come together to carry out business. It’s a bit like making an agreement to work together, but it’s more formal than that because the partnership will be registered as a business with HMRC.

Partners can be individual people, limited companies, or even another partnership. Each partner is jointly liable for everything that happens in the partnership, so you share the profits as well as the risks.

Partnerships do need to submit tax returns to tell HMRC about their profits, but they don’t pay any tax as an entity. Instead, each partner must submit their own tax return to report their share of the income, and then pay tax on that according to what sort of business structure they operate as. Each partner is responsible for submitting their own return and paying tax on their share of the profits.

For example, an individual partner will submit a Self Assessment tax return as a sole trader. A partner that’s a limited company will include its share of the partnership’s profits on its Company Tax Return.

How do I set up a partnership?

The partnership must choose a name to operate under, and one of the partners must act as the ‘nominated partner’. This is the person responsible for dealing with the partnership’s legal admin, such as registering the partnership with HMRC and submitting its tax returns.

Each partner will also need to register as a partner in the partnership (now try saying that fast three times!).

It’s usually a good idea to document the partnership agreement in writing. This makes it clear how the profits are to be shared, manages expectations, and sets out a process if someone wants to leave the partnership.

Limited Liability Partnerships (LLP)

A Limited Liability Partnership (LLP) is a partnership that limits the extent to which partners are liable for any debts the business incurs. Unlike a sole trader or partnership, where those involved are wholly responsible for any debts, an LLP limits the liability of its members to the amount they invest or personally guarantee against loans.

 
There must be at least 2 partners who are ‘designated members’, responsible for filing account information about the partnership. Each partner must also register as self-employed with HMRC and pay tax on the income they earn from the business.

Like regular business partnerships, it’s a good idea to create a partnership agreement which details how to share out profits, and who is responsible for what.

 
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