How to launch your Business
A lot of people dream of starting their own business. But they don't always know the first steps to take or have a clear understanding of the legal structures that are available. In this article we'll take you through four different ways of creating a business in the UK:
Sole trader
Partnership
Limited liability partnership
Limited liability company (LTD).
Each one has pros and cons, so understanding these and weighing them up are super important because either way there are taxes to pay and legal requirements to fulfil, and you probably don’t want to get them wrong.
Sole Trader
A sole trader is a business owned by one individual. It’s the simplest form of business to set up and no formal legal requirements apply, but you must be careful because you are personally liable for all the debts of your business. This means if things go wrong with your business and you can't pay your creditors, they can come after you for their money. You could also face bankruptcy if the debts are too big.
Generally speaking, sole traders are taxed as individuals rather than companies so profits are included on their personal tax return (known as an Individual Tax Return) instead of being taxed through PAYE deductions from their wages like employees would be in other business types such as a Limited Liability Company.
Partnership
A partnership is formed by two or more people who agree to contribute money, property, labour or skill to a common business venture. Partners share the profits, losses and management of the business.
Similar to Sole Traders, Partners are taxed as individuals rather than companies so profits are included on their personal tax return (known as an Individual Tax Return) instead of being taxed through PAYE deductions from their wages like employees would be in other business types such as a Limited Liability Company.
Limited Liability Partnership
A limited liability partnership (LLP) is a business structure that gives you the benefits of a partnership, including unlimited liability for the debts of the business, but with some of the advantages of a company. You can become an LLP in England and Wales if you:
choose a name
have a registered address that will be publicly available
have at least 2 ‘designated members’
have an LLP agreement that says how the LLP will be run
register the LLP with Companies House
Limited Liability Company
A Limited Liability Company is a type of business entity formed under law. There are 2 types; Limited by Shares or Limited by Guarantee.
Limited by Shares
It is made up of Shareholders who own a piece of the company through the shares it issues and Directors who look after the company on a day to day basis.
The company is:
is legally separate from the people who run it
has separate finances from your personal ones
has shares and shareholders
can keep any profits it makes after paying tax
Limited by Guarantee
Limited by guarantee companies are usually ‘not for profit’. This means the company:
is legally separate from the people who run it
has separate finances from your personal ones
has guarantors and a ‘guaranteed amount’
invests profits it makes back into the company
The biggest difference
The biggest difference between being a sole trader or partnership and the limited liability partnership or company comes down to liability, money and confidentiality.
Liability
Liability is the consequences of the decisions you make and the actions you take. When it comes to launching a business, understanding what you are on the hook for is super important.
Most people take out insurance to cover anything that could go wrong. And most of the time that insurance is more than enough.
But sometimes, it isn’t.
With Sole Traders and Partnerships, the people themselves are on the hook for anything that goes wrong. This means that if there is no insurance or the insurance limit has been maxed out any money owed to someone would be taken from the personal belongings of the business owner.
That means your house, car, cat, dog, all of it.
On the other hand, when there is a claim against a Limited Liability Partnership or Company, the claim is against the company and not the people in control of it. This means that the assets of the company are used to settle any claims and not the money of the individuals.
Money
The main benefit for Sole Traders and Partnerships is that any money you make is your personal money to keep and you only pay regular income tax on it. It also means that the success of the business is also private so you don’t have to publish your earnings. Only HMRC will know what your bag looks like when you submit your tax return.
On the other hand, Limited Liability Partnership or Companies have to publish their annual accounts on Companies House every year and are open to public security.
Confidentiality
One often overlooked issue is that of confidentiality. We touched on money in the point above but if you are working in the same place you live, you might want to think deeply if you want to publish where you live because you opted for the Limited Liability Partnership or Company route. Because your personal information will be published on the internet this does open you up the risk of identity fraud and cyber crimes.
Conclusion
There are many ways to form a business and there is no wrong way. You just need to make sure that your business complies with all the legal requirements and protects you from liabilities. Whether you choose to start as a sole trader or incorporate as a limited liability company, it’s important to know what these options mean in today's economy and how they affect your tax liability.
