Pros and cons: Popular ways to structure a business

Starting up a business on your own can be a very daunting decision to make, says Toby Preston, partner at Bray & Bray.

Choosing the right business structure will help you to reflect your company’s financial, tax and administrative needs. There are four common structures for new businesses, each with its own qualities to be carefully considered. If done correctly, it could turn out to be the best decision you ever make.

Sole trader

This is the simplest structure to use to run a business, and if you are not planning on employing anyone else, you will probably be best as a sole trader. Within this structure, you make all the decisions on how to manage your business and you also raise money out of your own assets and/or with loans from banks or other lenders. The benefit of being your own boss is counterbalanced by not having anyone to validate your decisions, but it also can leave you liable for debts and future liabilities.

Pros

•    Easy to set up.
•    There are no fees to register, as you will not need to register with Companies House.
•    It is inexpensive and you will not need to pay corporation tax.
•    You are able to go and start trading straight away.
•    You have full control over the business.

Cons

•    You have full financial responsibility and have to contend with yearly tax returns.
•    You have legal responsibility for your business, which can leave you exposed to a higher risk than other structures. The law makes no distinction between you and the business.
•    Any debt can be met from the owner’s personal wealth and assets if the business fails.

Partnership

This type of structure may be best for you if you are offering services with someone that you know well. It is similar to a sole trader, as the partnership is just as flexible but has the benefit of having two or more people making the decisions. With partnerships, it is best to have a partnership agreement made once the business is set up which will detail the liabilities, ownership and profits of the business are divided and what happens if one partner leaves.

Pros

•    Easy to set up.
•    Two or more people making the decisions.
•    More potential to raise the finances with having a partner(s).
•    Only legal requirement is that each partner is registered as self-employed and puts in a separate tax return.
•    With another person involved, means the business wont collapse if the other partner is sick or on holiday.

Cons

•    All partners are responsible for all debts owed by the business.
•    Both partners’ assets and wealth are exposed if debt needs to be repaid.
•    Lacks credibility in the market. If you were to try and sub contract work from larger companies you may have to incorporate you business to satisfy their guidelines.
•    If a partner leaves the partnership, the remaining partner(s) may be liable for the entire debt of the partnership.
•    Partners do not possess any protection if the business fails.

Limited Liability Partnership (LLP)

Limited Liability Partnerships could be seen as a cross between limited liability companies and partnerships. This is due to the fact that they offer limited liability available to limited company shareholders, combined with the tax regime and flexibility of a partnership. However, you do have to register with Companies House and are required to put certain information on the public domain, much like a limited company. Annual accounts are also need to be filed in an limited liability partnership.

Pros

•    The number of partners is not limited.
•    LLP protects member’s assets, limiting their liability to however much they have invested in the business, just like a limited company.
•    Gives you the flexibility of a partnership, can be incorporated in a members agreement.
•    Overall, gives you the advantages of a limited company and a partnership.

Cons

•    Partner’s share of the profit is taxed as income; each member has to register as self-employed.
•    Partners must disclose income.
•    LLP must start to trade within a year of registration or it will be struck off.

Limited Liability Company (Ltd)

Limited companies must be registered at Companies House, which lends credibility to your business. Most limited companies are owned by shareholders who are limited to their shares. This indicates the amount of share they have in the company and is the most than they can be called on to pay, if things go amiss. A limited liability company gives you the control of your exposure to financial risk. This is because a limited company is a separate legal entity to the company directors, which means the business itself takes financial liability if the business fails.

Pros

•    Credibility as a company.
•    Easier to borrow money, if the time comes.
•    Less personal financial risk, your home, family and lifestyle are protected.
•    Being a limited company gives you the ability to work for corporate businesses and clients.
•     Tax regime is more favourable. Corporation tax can offer a much more appealing rate than income tax.

Cons

•    Administrative demands are heavier and more regular.
•    Annual accounts and financial reports must be registered to Companies House also, which is in the public domain.
•    Making yourself the managing director may bring you status, but may prove hard when it is time for the year end accounts.

Toby Preston is a Partner at Bray & Bray Solicitors, who specialises in corporate law and business affairs. For advice about structuring a business, you can contact Toby directly at tbpreston@braybray.co.uk