The end of the tax year means are #soletraders asking us if they should go limited... here is our easy guide to see which structure is right for you
There are a lot of different ways to run your business, with different financial and administrative benefits. Each business structure has its own pros and cons depending on factors like how much profit you make or how you want to get paid.
We're nearly at the end of the tax year for 2019, and we have had a lot of sole traders asking if they should consider changing over to a #limited #company.
Being limited has its benefits, but there are important legal factors to consider when making the jump. Here we've outlined the 4 most common business structures so that you can think about which suits you.
Sole Trader
This is by far the simplest way to start and run a business. You must register with #HMRC for self-assessment as soon as you start trading and submit an annual self-assessment tax return. You will pay tax and national insurance on your profits but what’s remaining is yours. The main negative is that you are personally responsible for any business debts.
Pros:
Easy to set up
Low cost - less admin and compliance
Full control over the business
Privacy - accounts are not in the public domain
Cons:
Full liability - there is no distinction between you and your business, so any personal assets (like your house) would be included.
Partnership
This is a popular choice if setting up a business with another individual. It’s similar to operating as a sole trader. All of the partners share responsibility for the business and its debts. Partners also share the profits and pay tax on their share under the self-assessment system.
To set up as a partnership you would need to choose a name and a nominated partner (someone who is responsible for managing tax returns and records) and register the partnership with HMRC. Each partner would also need to register with HMRC for self-assessment and submit an annual return. A partnership agreement should be put in place outlining ownership, liabilities and how the profits are to be split, as well as an exit strategy should a partner decide to leave.
Pros:
Easy to form and run
More potential to raise finance
Cons:
Full personal liability
Potential disagreements amongst partners
Limited Liability Partnership (LLP)
An LLP has to have at least 2 designated members who are responsible for preparing and submitting the accounts.
This type of partnership limits the partners liabilities but, as with a normal partnership, each partners share of the profits is taxed as income and so partners must register as self-employed. The LLP must register with Companies House and submit its accounts on a yearly basis.
Pros:
Flexibility
Offers benefits of both a partnership and limited company
Cons:
Must disclose income
Ltd Company
A company is a completely separate legal entity from its owner and therefore the owners liability is limited. Companies must be registered with Companies House. Companies must prepare annual accounts and submit these to both Companies House and HMRC.
They must also submit a corporation tax return to HMRC each year and pay corporation tax at the relevant rate.
Corporation Tax rates for 2019/20 stands at 19%
As a Director of a company you cannot withdraw money from the company as easily as if you operated as a sole trader.
You can become an employee of your own company, where you can either take money as salary through payroll (for which you would need to register separately with HMRC for) and/or as dividend payments.
Most directors pay themselves through a combination of dividends and salary which can reduce your PAYE and national insurance contributions. Payments outside of salary are usually be taken as dividends.
There are strict rules in place with regards to directors loans and any overdrawn directors loans at the year end can result in hefty additional tax bills.
However, you can also possibly claim more business expenses that can be taken in to account and reduce your tax liability. It is important that you speak to a qualified accountant to veriphy what expenses you should be claiming.
Pros:
Limited liability
Usually more tax efficient for turnover over £30k
Can look more professional/prestigious. Some B2B contracts will only hire a LTD
Can take out dividends at a tax rate of 7.5%
Become an employee
A company has it's own credit rating - meaning more borrowing power if the individuals' credit is poor.
Cons:
Set up costs
Accounts are in the public domain
You cannot withdraw money as and when as easily
More admin and compliance (time and costs to comply with your legal duties)
Should you make a change?
As you can see, there are quite a few things to think about when it comes to moving your business structure - but the benefits of the right one can have a significant impact on your bottoms line and future business plans.
If you are thinking about registering a limited company - you should seek specifical and professional advice with an accountant about the pros and cons of your business going Limited.
You can chat through your options with our accountants; Katie or Robyn to see the tax benefits of your business and check to see how you can run an efficient business.