Creating the right business structure

Many people assume that everyone who has their own ‘business’ runs a ‘company’.

However the two words do not mean the same thing. There are actually four common forms of business structure:

A sole trader – this is the simplest way of starting and running a business.

A conventional partnership – where you work with one or more partners in the business.

A limited liability partnership – LLP – this provides you and your partners with the protection of limited liability, just as with a company.

A limited liability company – this means that the business is quite separate to youas a person.

The issue of whether to run your business as a company or a sole trader or partnership is an important decision. And you may change your mind over time. If you want to move your existing business into a company structure this is called ‘ incorporation’. But what are the differences with various business structures?

Sole trader: The advantages of being a sole trader include independence, ease of set up and running your business, and the fact that all the profits go to you. The disadvantages include a lack of support, unlimited liability, the prospect of paying more tax on high profits and the fact that you are personally responsible for any debts run up by your business.

Partnership: The advantages include its ease of set up and running, and the range of skills and experience that the partners can bring to the business. Problems can occur when there are disagreements between partners. There is unlimited liability and all partners are each personally responsible for all of the debts that the business runs up. Again there is the prospect of paying more tax on high profits thanif youhaveacompany.

Limited Liability Partnership (LLP): LLPs retain the flexibility of a partnership with the added advantage that your personal liability is limited. Atleast twomembers must be‘ designated members’ –the law places extra responsibilities on them. The formation of an LL P is more complex and costly than that of a conventional partnership. Problems can still arise whenthere are disagreements between the members. Again there is the prospect of paying more tax on high profits than if you have a company.

Limited Liability Company: If you run your business through a company your personal financial risk will be restricted to how much you invest in the business and any guarantees you have given in order to obtain financing. You will also beabletoretain more money in the company after paying less tax than if you operate as a sole trader or partnership. However, you should remember that this type of business structure, more than any other, also brings a range of extra legal duties.

We would welcome the opportunity to talk to you about your specific circumstances.

We can help you to consider all the relevant factors and choose the appropriate business structure.