Starting a new business can be many people’s biggest professional goal, but one of the most crucial early decisions you’ll face when starting a new venture is choosing the right legal structure. This choice can have significant implications for your businesses operations, taxes, and personal liability. This article will help to guide you through the process of choosing the right legal structure for your business, and the team at Savage Silk can always help if you need further assistance or advice!
Brief Overview of the primary legal structures for UK businesses:
Each of these business structures has its own advantages and disadvantages which should be explored in detail so you are sure which will be the most appropriate and beneficial for your business.
Sole Trader
The Sole Trader structure is the simplest form of business organisation. As a sole trader, you are self-employed and run your business as an individual. This structure is very popular among freelancers, consultants and small business owners and it comes with some clear advantages.
It’s easy and inexpensive to set up as a sole trader, and you will have complete control of business decisions. There are simple accounting and tax requirements and all of the profits belong to you.
This is not to say there are no potential disadvantages with setting up as a sole trader, however. There is unlimited personal liability for business debts and it may be challenging to raise capital if you’re in need of funds for business purposes.
Partnership
A partnership involves two or more individuals running a business together. Each partner contributes resources, shares the businesses profits, and bears responsibility for the businesses debts.
A Partnership is easy to both establish and operate, and you have shared responsibility and expertise with other partners, with potential for greater capital investment than if you were to set up as a sole trader.
There are, however, some potential disadvantages of setting up as a partnership. Partners have unlimited liability for business debts, and there is potential for disputes between partners. There will also be a lack of continuity if a partner is to leave the business for whatever reason.
Limited Liability Partnership (LLP)
An LLP combines elements of partnerships and limited companies. It provides the flexibility of a partnership with limited liability protection of a company.
The first clear advantage of setting up as an LLP (as opposed to a partnership) is that partners have limited liability, meaning that your personal assets can not be used to satisfy the LLP’s debts if any were to arise. An LLP is flexible in internal structure and partners are taxed individually for tax transparency.
An LLP is more complex to set up than a general partnership and you will be required to file annual accounts and returns.
Limited Company (Ltd)
A limited company is a separate legal entity from its owners (shareholders). It can be limited by shares or by guarantee.
Again, the first clear advantage when setting up as a limited company is that there is limited liability for shareholders. It is potentially easier to raise capital, enhanced credibility and professionalism and potential tax advantages, also.
It’s more costly and complex to set up and maintain a limited company, and there is increased regulatory requirements and paperwork. Due to public filing requirements, there is also less privacy.
Factors to Consider When Choosing a Legal Structure
Liability Protection – Consider the level of personal liability you need. If you’re entering a high-risk industry or have significant personal assets to protect, a limited company or LLP might be more suitable than setting up as a sole trader or partnership.
Tax Implications – Different legal structures have varying tax obligations. Sole traders and partnerships are subject to income tax, while limited companies pay corporation tax. To understand which structure might be the most tax efficient for your business, it is always wise to consult with a professional.
Funding and Investment – If you’re planning on seeking external investment or anticipate needing significant capital in the future, a limited company structure may be more attractive to potential investors.
Complexity and Costs – Sole traders have the simplest requirements when it comes to administrative burdens and costs, whereas limited companies face more complex regulatory obligations and higher set up and maintenance costs.
Growth and Future Plans – It’s also important to set up your business with the future in mind. If you plan to expand, hire employees, or eventually sell the business, a limited company structure could be more suitable for you.
Making an Informed Decision
Choosing the right legal structure for your business is a very important decision that requires understanding of both the future of your businesses needs and which options will be best for you long term. While this guide provides an overview of the main options and some different factors to consider, it’s an absolute must to seek professional advice.
The Savage Silk Corporate and Commercial team can assess your situation, consider your business goals and help to guide you to the best legal structure.
Remember, the legal structure you choose at the start doesn’t necessarily have to be permanent. As your business grows and evolves, you may find that a different structure becomes more appropriate. Regular reviews with your legal professional can be vital to help ensure your business structure continues to meet the needs of your business.
Still Unsure?
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