Business structures - what's best for you?

Having a company structure does not guarantee you’ll save tax. If you trade as a company, provide services to one or a few clients, and the engagement is one that is of the same nature as an employment relationship then there could be a requirement for you to be taxed as though you were an employee and pay income tax and national insurance contributions at those rates. These rules are known as IR35, or ‘off-payroll’ rules. ​

The result is exactly the same as if you use the sole trader structure. Read more on frequently asked questions about being a sole trader.​

Since the income tax rate for individuals is 45% HMRC are very much aware that individuals may change to a company structure for no other purpose than to reduce their tax bill. This could be considered tax avoidance and the off-payroll workers rules have been put in place to prevent this.​

If you’re the size of a sole trader but operating as a company, and/or the company has few assets, lenders are likely to request a personal guarantee from the shareholder(s). By giving this personal guarantee, the shareholder(s) personal assets may be taken or liquidated to settle the debt.​

Sole trader business structure is the easiest option for a start-up. A sole trader is a person trading on their own.​

The sole trader:​

As a sole trader you can usually begin the business without following any formal or legal processes to establish it. You may employ other people to help run the business.​

Quick and cheap to get going, just start trading in your own name. You will need to request a self assessment unique tax reference (UTR) from HMRC, which you will need along with your National Insurance Number in order to submit your self assessment tax return to HMRC. You will need to register for VAT if you earn more than £85,000 in any 12 month period.​

You can’t split your income for tax purposes which means that if you earn a reasonable amount, you’ll be exposed to the highest tax rates.​

You also have no protection against creditors and other claims against you.  If you also own your own home, then you place this at risk.​

Partnership is often associated with professional practices, and it's less common these days. In a partnership, two or more people run a business together.​

Each partner:​

Many partnerships are established with a formal partnership agreement.​

The partnership itself does not pay income tax. Instead it distributes the partnership income to the partners. The partners then pay tax on their own share.​

Income, tax credits, rebates, gains, expenditure or losses allocated to a partner in a tax year will generally be allocated in proportion to each partner’s share in the partnership’s income under the partnership agreement.​

A limited partnership exists as a formal and legal entity in its own right. It is separate from its partners.​

Limited partnerships need to be registered with Companies House and cost £10 for registration along with an additional charge of £13pa for each Confirmation Statement to keep the LLP registered.​

Partnerships give certainty about what happens to the business profits.  Profits are taxed according to individual circumstances as all profit is paid out to the partners and they pay their own tax.​

There is no flexibility about the division of profits and tax is paid at the individual’s rate which can expose the partners to the highest tax rate, if profit is high.​

In addition, most standard partnerships mean that all partners are jointly responsible – so again people can place their personal assets at risk.  The limited liability partnership (LLP) is designed to reduce this risk.​

A company exists as a formal and legal entity in its own right. It is separate from its shareholder(s) or owner(s). The cost of registering a company is £10 and the annual Confirmation Statement filing fee is £13. ​

The company:​

The shareholders’ liability for losses is limited to their share of ownership of the company.​

This is the most common trading entity so gives the business a more commercial look and feel, profits can be retained in the company or paid out to shareholders and therefore gives the tax flexibility, and liability is restricted.  This provides business owners with some protection from creditors or other claims.​

You have to pay to incorporate and you must produce a set of annual financial statements that comply with company law.  This generally adds a small amount onto your compliance costs.​

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