If you are starting to give serious consideration to setting up your own business one of the issues you will need to consider is the type of business structure that best fits your planned business activity.
How risky is your business?
All business activity involves a certain degree of risk. Many of these risks can be covered by taking out an insurance policy. But some risks carry a degree of personal involvement that cannot be insured against. For example, your bank may agree to a business loan but only if you agree to a charge against your home or some other form of personal guarantee.
What are the main business structures?
The simplest form of business structure is to set up as a self-employed person, otherwise called a sole trader.
Any profits you make are subject to Income Tax and National Insurance.
Any business debts you incur are personal to you and therefore your business creditors may have access to your personal assets to clear any amounts the business cannot afford to pay.
Because of this personal risk, self-employment is not suitable for higher risk enterprises.
Self-employment is also not the most tax efficient structure if your business profits are taxed at the higher rates of Income Tax. If this is likely, a limited company structure may be a better option.
If two or more people want to set up a business together they will need to form a partnership. A basic partnership, as with a self-employed person, is taxed on the basis of each partner’s share of annual taxable profits and subject to Income Tax. Similarly, liability is unlimited as for a self-employed person.
However, there is a specialised form of partnership called a Limited Liability Partnership (LLP) which does protect partners’ personal assets from claims by partnership creditors.
A Limited Company
If there are business risks or if a business is planning to make significant profits, a limited company is probably the best option. For two reasons:
- Company profits are presently taxed at 19% – this compares with Income Tax rates that can be as high as 45% (regional variations may apply).
- Limited company creditors can only claim against company assets in order to clear their bills unless the directors offer a personal guarantee.
Planning is the key
The best choice for your intended business will rest on the type and scale of your intended activity and an assessment of any commercial risks involved.
If you are considering a new business venture please call so we can help you figure out the best structure for your business, based on risk and tax issues.