The Three Major Business Structures
The significance having the proper business structure may make or break your company. As a result, choosing a structure suitable for the scale and purpose of your operations is vital.
This blog will look at the UK’s three major business structures: sole traders, partnerships, and limited companies.
What is the Purpose of a Business Structure?
One of the most important decisions a business owner makes, other than choosing its market and offerings, is deciding upon its business structure. This decision will determine who owns the business, how profits are allocated, and which management handles which responsibilities.
Depending on its structure, the business will be taxed differently, and managers and owners will be held to varying degrees of accountability in the event of misconduct or a lawsuit. This makes it vital for tax and liability reasons as well.
The Three Major Business Structures Include:
In the UK, there are three main types of business structure. Sole traders, partnerships, and limited companies. Each type of business has different tax considerations and legal requirements.
A sole trader is the simplest structure if you’re going into business for yourself. You’ll be responsible for running your business, registering with HMRC, paying taxes, and dealing with potential legal issues.
Your income is yours to keep, but you must file Self-Assessment Tax Returns to account for all your earnings and any income tax and national insurance payments. There are no restrictions on how much money you can earn, but this structure may not be suitable if your income is unpredictable or there is a high level of risk. All assets are considered jointly controlled and owned by you personally, so any debts incurred can also damage your finances.
The term “partnership” refers to a company structure in which two or more people agree to split the gains and losses of the business.
Partners are jointly and severally liable for the company’s debts and liabilities, which means that partners can be held personally responsible for all debts incurred by the business. Each partner is entitled to a share of profits based on the percentages outlined in their partnership agreement.
A limited company is the most complex structure you can choose. This means it can be more challenging to set up and run than a sole trader or partnership, but it also offers tax advantages and protection from personal liability.
For those looking to form a limited company, HMRC and Companies House have extensive requirements for which information needs to be registered. Depending on the company’s size, this is often a lot of paperwork and may include anything from sending in a confirmation statement and company accounts to filing a company tax return. As a limited company, your annual financial reports and accounts will also be available to the public.
Even though limited companies are more complex and expensive than sole traders or partnerships, it offers many benefits, such as a separate legal identity, which means that your assets will be safe if the company goes bankrupt.
If you build up your business enough, it can become one of the most tax-efficient structures, and you can save a lot of money.
Choosing the structure of a business is not a decision you should take lightly. The structure you choose will determine the number of factors, such as your tax liability, liability protection, and even how much capital your company needs to start.
The three structures discussed above have distinct advantages and disadvantages that must be considered when choosing the right one for your company.
At MTM, we offer up-to-date legal and regulatory guidance on the company structure that’s right for you. We can assist with setting up any type of UK company, helping to ensure that your business gets off to the best possible start. Contact us today to find out how we can help you!