Structuring your business is something you’ll need to do, for legal reasons on day one. But just because you have started one way, doesn’t mean you can’t change, further down the line.
A business structure describes the legal structure of a business; it influences day to day operations, your finances, the control you have over your business, your responsibilities and the opportunities to make a profit, so it is essential to get right.
The UK offers three main types of business structure; sole trader, limited company, and business partnership.
This is the most common and simplest form of business structure; many freelancers, self-employed and those starting out in business will find themselves opting for this. If you are a sole trader, you are working for yourself and must register with the HMRC. All profits become income, but you will be liable for tax and national insurance against your earnings. This is a great way to start, as it is easy to manage if financial management is not your forte, but as you grow, this route can become inefficient for tax purposes and restrict your ability to grow.
A limited company is owned by shareholders and run by directors. It recognises the business as a separate legal entity to its owners (unlike a sole trader or partnership). This means that any liabilities, such as financial pressures, are limited to the company. Any profits generated are retained by the company after Corporation Tax is paid. Profits can then be distributed to shareholders in the form of dividends. The financial management of a limited company is a much more involved process than that of a sole trader, as annual reporting is required for both Companies House and HMRC. Whilst it’s a more detailed process, there are many benefits to becoming a limited company. You can choose how dividends are paid (how much you can earn), your business can retain profits, you can claim expenses and you can get VAT relief on business purchases.
A partnership is where two or more individuals agree to share in the profits or losses of the business. They share all the responsibilities, costs and benefits of running a business. The partners will be self-employed and personally responsible for any losses and debts that the business creates.
The difference between this and a sole trader, is that there is more than one person. Seems obvious, but it means that each partner is responsible for the other, including their negligence and misconduct, so you need to know who you are going into business with, and have a mutual trust and shared goals.
A key difference from being a limited company is the financial implication, as the income is paid to partners, who declare it personally on their tax returns, rather than the partnership being taxed on profits or losses.
Many businesses will start out one way and naturally evolve over time, so it is possible to change the structure of your business at any point. But, it’s not a decision to be taken lightly, you should carefully consider your plans for the future, seek advice from your network and those that have been down the same path, and speak to a financial contact as they will be able to offer some expert insight, bespoke to your business.
One of the most frequent reasons behind changing structure is taxation; never fun but always needed. As your business grows, or slows, your finances will too, understanding which business structure is of most benefit to your earnings will be key, it can also offer legal protection if your business is taking bigger risks.
The SiGNAL community includes several professionals who would be able to share some advice and insight when it comes to business structure, but our advice, as ever, is to talk - whether it’s to us, a colleague, a networking contact or a third-party expert.