As a start-up or first-time founder, it may well be that the last thing on your mind is how to structure your business. That’s understandable, because sorting out the legals may not seem high on your priorities list. You may see it as unduly time-consuming, or something that can be delegated or dealt with another time.
That’s a mistake. Choosing the right structure for your business brings many benefits, from protecting your IP and attracting future venture capital to accessing tax breaks that will improve your cash flow. Not to mention the fact that a business represents not just an income stream but potentially a valuable capital asset.
So, how do you choose the type of business entity that’s right for you? There is no right or wrong answer to the best business structure, however some structures may be more appropriate than others. Here’s our advice when considering your company structure:
Making it big
If your goal is to grow your business, attract new business, sell it on and retire on the proceeds, then a limited company is for you. This is the most flexible format for achieving instant credibility, attracting investment and doing business with the least friction possible. If you’re stuck between setting up as a sole trader vs limited company, you should consider how much you could limit your growth as a sole trader. You may also pay less tax, and as well as providing you with an income your shares will grow in value too if your company is successful.
Alternatively, if you’re a consultant or specialist with a regular stream of clients, you may find that setting yourself up as a limited company is more tax-efficient than being a sole trader. You may find that the overall tax burden is lower than if you are self-employed as there are no NICs payable on dividends you pay yourself.
In terms of dealing with third parties like suppliers, customers and funders, most serious businesses are set up as limited companies. That’s not to say that sole traders or partnerships aren’t taken seriously, but if you want to make your mark and be the next Airbnb or Amazon, a limited company should be your choice. Plus, if you need to borrow, you’ll likely achieve better terms.
Keeping things simple
If your business is a great way to make money but your overall goal is to lead a stress-free life and work to live, then becoming a sole trader may be the way to go. While you will have personal liability for the products or services you provide, if these are low-risk (artisan products) or your liabilities can be insured against (building services), being a sole trader is a good option. And if your business is successful, your trade name and assets will have value so you can always sell these on if you choose to retire.
Keeping things flexible
If you’re a professional with a regular clientele and would like to join forces with similar individuals so that you can share the risk and rewards of your business, then a partnership is the way to go. Unlike a company, you can divide up the profits any way you want, and your partners can come and go depending on your business’s needs. And if you need to keep things private and limit your liability (such as accountants, architects and lawyers), you can go the limited partnership route.
Certain products and services are high risk, such as medical devices and food products. If a faulty device or contaminated batch of high-energy drinks could sink your business, then consider a limited liability company. The company can insure against these risks and you’ll sleep better knowing your home isn’t on the line.
While we know that taxes are what keep the country ticking over, no-one wants to pay more than their fair share. A specialist tax advisor can help you unpick your options and choose the business structure that’s best adapted to your business and personal needs.
You just want to have fun/make a difference
If your aim in doing business is just to pursue your leisure goals or make a difference in the world on a proper footing and without personal legal liability, then a company limited by guarantee or a Community Interest Company may be the way to go.
A comparison of the different types of business structure
|Sole trader||You are your own boss, own all the assets, keep all the profits and are responsible for all the debts. You will be self-employed.||The advantages to setting up as a sole trader are that it is easy and cheap to set up, you keep control of decisions, and there’s very little admin. You will also have full privacy over all business matters.||Setting up as a sole trader means that you’re responsible for all debt, taxes are higher than for a company, and you may have less credibility if you want to enter into large contracts.|
|Limited share company||Limited companies are separate legal entities that can employ staff and own assets. Shareholders are only liable up to the nominal amount of their shares.||As a limited company you can expect better tax regime, more credibility, and little personal financial exposure for owners.||Costlier to run because of admin and regulation. Accounts and other documents are public, so privacy is limited.|
|General partnership||A business partnership structure means that two or more people are in business to make money and share the profits. Each partner is self-employed.||Easy and cheap to set up, the partners share the work and decision-making. You will have full privacy over all business matters.||If you’re setting up as a general partnership and you don’t have a written agreement, things can get problematic if disagreements occur, or if one partner is contributing more than the others.|
|Limited liability partnership (LLP)||A limited liability partnership is like a general partnership but with limited liability.||Partners can join and leave easily, and you can share the profits how you like. Personal liability of partners is limited.||In a limited liability partnership there is a lack of privacy as the partnership agreement is public. Partners are self-employed so taxes may be more than for a company.|
Want to find out more about the types of business structures available? See our article Everything you need to know about start-up business structures.