So you’ve decided to Start-Up that business idea floating about in your head, and turn it into a reality; you’ve got a name, now you just need an Entity- but which is right? Limited Company, Sole Trader or Partnership?
You should assess the types based on your available time, commitment and resources, and consider long-term goals for your business. Although you can change your ownership type at any time, you should decide carefully, because the form of business you choose will affect the way you file paperwork, face personal liability, pay taxes and, if necessary, file for bankruptcy protection.
One person owns and manages a sole tradeship, which means you are responsible for all debts incurred.
Advantages: Easy. Inexpensive. Complete control of operating decisions. Generated income goes to owner to keep or reinvest. Easy to dissolve if the business does not go as planned.
Disadvantages: Unlimited liability. Funding difficulties. Less attractive to prospective employees.
Tax requirements: Sending a Self Assessment tax return every year, paying Income Tax on your profits and Class 2 and Class 4 National Insurance.
A limited company is an organisation that you can set up to run your business – it’s responsible in its own right for everything it does and its finances are separate to your personal finances. Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits.
Advantages: Higher take home pay, claim on a wider range of expenses, entitled to the Flat Rate VAT scheme, personal assets are covered and you have complete control of your business.
Disadvantages: A certain amount of paperwork involved, accounts need to be filed every year, costly if contracting for a short period of time and not ideal for contracts less than £25,000 per year.
Tax requirements: At the end of its financial year, your limited company must prepare full (‘statutory’) annual accounts.
You then use this information to:
- send accounts to Companies House
- pay Corporation Tax – or tell HM Revenue and Customs (HMRC) that your limited company doesn’t owe any
- send a Company Tax Return to HMRC
In a business partnership, you and your business partner (or partners) personally share responsibility for your business. You can share all your business’s profits between the partners. Each partner pays tax on their share of the profits.
Advantages: Businesses as partnerships do not have to pay income tax; each partner files the profits or losses of the business on his or her own personal income tax return. This way the business does not get taxed separately.
Easy to establish.
There is an increased ability to raise funds when there is more than one owner
Disadvantages: Each partner is individually liable for the debts and obligations of the business; if the business does not have enough assets to pay back business debts, creditors can take the personal assets of the partners.
A partner cannot transfer an interest in the business without the unanimous consent of the partners.
Partnerships can potentially be unstable because of the danger of dissolution if one partner wants to withdrawal from the business or dies.
Tax Requirements: The nominated partner must send a partnership Self Assessment tax return every year.
All the partners must:
- send a personal Self Assessment tax return every year
- pay Income Tax on their share of the partnership’s profits
- pay National Insurance
- The partnership will also have to register for VAT if you expect its takings to be more than £85,000 a year.
If you are about to commence your start-up journey, please do get in touch with us here at DNA Accountants we are always happy to talk business.