Choosing The Right Legal Structure For Your New Business 

February 28, 2017 1:39 pm Published by

choosing the right structure from your businessSo you’ve had your big idea, then after researching your business idea, determining your target market and sizing up your competition, you are ready to set up your business. But there is st
ill a long road ahead of you before you can consider your new business a success.

 In this blog post, we’ll cover a number of topics you need to consider before starting your business and things to be aware of when you begin trading.

Choosing The Right Legal Structure

Choosing the right legal structure for your business is very important, and will depend on a number of things – take a look at the most common legal structures to help determine which one is better suited to your business model:

Sole Trader – Becoming a sole trader is the simplest and most common form of business set-up, it requires very little record keeping and registration. It is quick and low cost, however, you will be responsible for any losses your business makes.

Partnership – Entering into a partnership means you are going into business with another person or ‘legal person’ such as limited company.  You are creating a separate legal entity that you are both responsible for. Partnerships generally mean less work for each person than a sole trader – but shared ownership does carry the risk of disputes to arise between the partners.

Limited Company – Limited companies are one of the most popular legal structures for businesses of all sizes across many sectors in the UK. Limited companies are considered as separate entities, meaning shareholders are only responsible up to their value of shareholding should the business run into financial difficulty. However, there are generally more costs involved with the set up and ongoing running of the business, including accounting and administration.

Limited Liability – Like a limited company, a Limited Liability Partnership (LLP) gives the benefits of limited liability should the business run into financial trouble, but keeps some of the benefits of a traditional partnership. However, there is a lack of privacy for the company as the financial accounts must be submitted to Companies House which the public have access to.

If you are unsure about which legal structure is right for your new business, you should get in touch with an expert who can guide you through the ins and outs of each structure and help choose the one most suited to you.

Advantages and Disadvantages Of The Most Co
mmon Business Structures – Overview

Structure Key Advantages Key Disadvantages
Sole Trader Easy and low-cost set-up

 

 

Information about sole traders is kept private

 

 

Complete ownership of the business means you keep any profits made

 

Unlimited liability if the business fails

 

Difficult raising funds to finance their business or obtain a mortgage

 

The success and failure of the business rests on you

 

Unpaid holiday or sickness

 

Larger companies may avoid sole traders

 

The new HMRC digital tax account is being rolled out for sole traders first in 2018, completely online with quarterly reporting

Partnership Utilisation of more than one set of skills

 

Working with another entity means less time pressure on both partners

 

Easier to raise funds when split between entities

 

If one party decides to pull out, the business may fail

 

Working with another entity can lead to disagreements between partners

 

Unlimited liability if the business fails

 

Additional partnership tax return required

LLP No corporation tax to pay, individual partners pay tax on their own earnings

 

Limited liability means there is  reduced risk should the business fail

 

Flexible internal structure

 

Enhances the business making contracts from bigger clients more likely

More accountancy requirements compared to sole trader or partnership

 

Lack of privacy as business information must be disclosed

 

 

Structure does not suit most partnerships

Submission of annual accounts to Companies House

Limited Company Limited liability means losses made should the business fails are limited to the amount invested by shareholders

 

Opportunities from bigger clients more likely

Ongoing accountancy and admin costs likely to be much higher than other business structures

 

Larger costs incurred when setting up the company

Start Record Keeping – Accounting Responsibilities

Whatever business structure you opt for, once you are set up, accounting is going to be an important part of your day to day running. Business expenses and obligations can be overwhelming without help, so ensuring detailed record keeping and making use of an accountant will give you peace of mind from tax obligations and free up your time to focus on the business.

In addition to this, your accountant will be there to assist you in other areas of your business including applying for loans, managing your payroll, sorting out your tax returns, offering assistance when hiring new employees and
helping you choose the right path to move your business forward.

Need A Hand?

If you are having difficulty deciding which legal structure is right for your new business, or are struggling with your existing accounting obligations – we can help. We have a wealth of experience working with businesses of all sizes across many different sectors, for more information give one of our friendly team a call on 0117 3790810

Steph Roffey

Steph is a Chartered Accountant with many years’ experience working in audit compliance and general accountancy. She is a Fellow of the ICAEW and has extensive knowledge of accountancy and tax for the self employed.

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This post was written by Steph Roffey

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