Choosing a Business Structure

Are you embarking on a new business venture as a self-employed individual or with a partner? Choosing a business structure is an important decision, as the different business types have varying administrative requirements and legal protections. We’ve compiled a comparison of the main differences between being self-employed and trading through a limited company, to help you choose the most suitable option for your business. The three main business structures are:

• Self-employed or sole trader
• Limited company
• Partnership

Self-employed

If you plan to operate your business as a sole trader or self-employed individual, you must register with HMRC as self-employed. Anyone with trading income over £1,000 annually from self-employment must register with HMRC and submit annual self-assessment tax returns. You will need to keep records of your business income and expenses, as you will pay income tax and national insurance contributions on your net profit via your self-assessment tax return.

Self-employed individuals pay income tax on their annual net profits (sales less expenses) and pay Class 4 national insurance contributions. As a self-employed individual, you are personally liable for the liabilities and debts of the business, although you can take out insurance to mitigate against this. HMRC has a handy calculator for estimating your PAYE and NI liability:

Budget for your Self Assessment tax bill if you’re self-employed – GOV.UK (www.gov.uk)

Limited company

Limited companies must be registered with Companies House and HMRC for corporation tax. There is additional administration to running a business as a limited company. Limited companies must submit an annual return and financial statements to Companies House plus submit a corporation tax return, together with any tax owing to HMRC. The annual financial statements and tax return must be filed 9 months after the end of the financial year.

Directors of limited companies have greater flexibility in how they withdraw earnings. They can pay themselves a salary through payroll and draw dividends from the business, paying dividend tax via their self assessment tax return. They can leave funds in the company to build reserves.

Limited companies with net profits of £50,000 or less are subject to 19% corporation tax. Companies with net profits between £50,000 and £250,000 will pay tax between 19% and 25%, depending on their profit. Finally, companies with net profits exceeding £250,000 pay 25% corporation tax. It is advisable to enlist the services of an accountant to prepare your financial accounts and calculate your tax liability.

Partnership

A partnership may be an appropriate business structure where two or more of you are working in the business. All partners share responsibility for the business, including all bills and any losses. Each partner receives a share of the profits and pays income tax on their share of the profits through a self assessment tax return. Furthermore, the partnership needs to designate a nominated partner who is responsible for submitting the partnership’s tax return and maintaining the business records. All partnerships must be registered with HMRC.

Alternatively, a partnership can be a limited partnership registered with Companies House. Limited partnerships must have at least one general partner and one limited partner, with all partners paying tax on their share of the profits. As with limited companies, limited partnerships are liable for the bills and debts of the partnership, protecting the partners’ personal assets. To learn more about partnerships, the link below takes you to the gov.uk website providing more information:

Set up a business partnership: Setting up – GOV.UK (www.gov.uk)

Comparison of self-employed and a limited company