If you are setting up a business, you may have questions about which business model is right for you.
The way in which you set up your business can have implications for tax, how you are paid, ownership of the business, how business decisions are made, and the level of administration you may need to do. As a result, it is important to choose the right business model from the outset. In this article, we give an overview of three of the main business models and the benefits and drawbacks of each. However, if you are unsure, you should seek legal advice.
Benefits of being a sole trader
If you choose to operate as a sole trader, from both a legal and tax perspective, you and your business are treated as being the same entity. Effectively, this means that you are responsible for any debts incurred by the business, and you will pay tax and National Insurance contributions on the profits of the business as your personal income.
However, many benefits come with this simple operation. You will not need to register the business with HMRC; you simply need to let them know you are operating and self-employed for tax purposes. There are far fewer administrative matters to deal with as a sole trader, and it is much easier to take money out of the business. You will not be required to file annual accounts or submit a confirmation statement. When the time comes, it is also much easier to cease trading and close the business than with a limited company, which can be complicated where the company has debts.
Entering into a partnership
If you are going into business with someone else, you may consider entering into a partnership. A partnership has many of the same features and benefits of being a sole trader, but you share the responsibility with the other partners. Partnerships are straightforward to set up and are more flexible than limited companies in terms of structure.
Partners in the business own a percentage of the business – typically set out in the Partnership Agreement. Partners pay tax on their share of the profits. Having multiple business owners means that the financial responsibility and management of the business can be shared. The opposing side to this is that often in partnerships, disputes can arise between partners and how decisions are made may not be set out as clearly as it is for limited companies.
Why set up a private limited company?
The most important difference and benefit of setting up a private limited company is the concept of limited liability. When a company is formed, it is deemed to be a separate entity from the shareholders who own the company and its directors. This means, there is a reduced risk to shareholders if things do not go according to plan, as they are not personally responsible for the debts of the company in most cases.
To set up a company, you must incorporate the company and register with Companies House. There are several documents which must be created in order to incorporate, including Articles of Association which govern how the company is run. The company is owned by those holding shares which can be allocated to any number of people following incorporation. You can also hold all shares yourself. Companies require far more administration than other models, and failure to comply with these legal requirements can be costly.