Starting and running a successful business is something a lot of people in the UK do to earn a solid living. Many CEOs started their billion-dollar companies with just an idea. One thing however is of utmost importance, and that is choosing the right business structure. Making the right choice can have a strong impact on how you run your business effectively. Factors such as tax and personal liability are directly influenced by the type of structure your business has.
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In this article, we will be highlighting the four different business model types to choose from in the United Kingdom.
Also known as the self-employed option, the sole trader model is the most convenient to register. For this reason, it is the most commonly used business structure in the UK. Individuals who opt for this type of structure have to register their business at no cost with Her Majesty’s Revenue and Customs (HMRC). While this is an individually run business, you may still employ people to work for you by informing HRMC and operating under the employment law.
One setback to note with this structure is that the business and individual finances are one and the same and not legally separate, and this could potentially cause problems in the future.
Similar to the self-employed model, here at least two people sign an agreement to split the ownership, profits, losses, and liabilities of the business. Also shared among partners are the costs and risks related to running the business. While there are no limits to how many partners your company may have, it is not recommended to have too many partners as it may pose a huge risk to the company in the long run. In a partnership, all involved parties are registered as self-employed and each provides separate tax returns. The profits each partner is entitled to are determined by a profit-sharing ratio, and it is on the profits derived from this ratio that each individual will determine the amount of tax to be paid.
A notable disadvantage to this model is that losses, debts, and other negative impacts are also shared by partners. It is always important to go into this type of structure only with people you know and trust.
Registering as a limited company causes the company to be its own entity outside of the owners. This means that the company has a separate identity from its directors unlike that of sole traders and partnerships. Limited companies have to be registered at Companies House. A company under this structure may be limited either by shares or by guarantee. A company limited by shares has shareholders and share capital, while one limited by guarantee has guarantors. Profits made in a limited company are owned by the company itself. Dividends are paid to shareholders only once the corporation tax is paid.
Compared to sole tradership and partnerships, the Limited Company model usually requires more financing and manpower to run and is suitable for businesses that have already found their footing.
Limited Liability Partnership (LLP)
This model like the name implies shares some similarities with the partnership business structure. Here, however, the sum of a partner’s investment determines their liability. A partner in an LLP may be an individual or a company. Two or more partners in this model also have to be assigned designated members, and these members will be responsible for the preparation and filing of the company’s annual accounts. An LLP agreement determines how the responsibilities, as well as profits in the company, are shared among partners.
A Limited Liability Partnership company is registered at Companies House and Her Majesty’s Revenue and Customs (HMRC). This company structure is especially useful for existing partnerships that wish to expand.
To conclude, it is important to understand your business to ascertain the best business model to register under.
However, at a cost, it is possible to change an existing structure to a different one in the event that the need arises.