Setting up a new business can seem a bit daunting. Boffix guides you through the different types of company structure and how they impact your tax and legal liabilities.
Thinking about setting up a company? You’re not alone. A growing number of adults in the UK are choosing to spurn the corporate route to start their own business. Official data from Companies House shows a record-breaking 608,110 businesses were started in the UK last year. And recent figures indicate the UK’s start-up boom shows no sign of slowing, with 1 in 10 aspiring business owners looking to go it alone. In fact, a quarter of UK adults want to start their own business in 2016, according to a survey by social enterprise cause4. We all have different reasons for starting a business – whether it’s to escape corporate life, live a passion, or work flexibly around childcare or other commitments. (We’ve all been there!). Either way, there’s an exciting cultural shift towards entrepreneurialism.
So, presuming you already have an idea to start selling products or services, you’re probably now thinking: How do I turn my business idea into reality?
First, you need to decide on the best structure for your company. It’s important to do this at the outset, before you begin trading. This will define your legal requirements and there’s paperwork you must fill in to get started. Don’t worry, it’s not set in stone – you can change your structure further down the line if you want to.
What type of company should I set up?
You have five options:
• sole trader
• limited company
• business partnership
• limited partnerships and limited liability partnerships
• unincorporated associations
The first three business entities are the main ones so let’s focus on those for now. Obviously there are pros and cons for each.
This is the easiest way to start a business in the UK. Essentially, it means you’re self-employed and run your business as an individual, though you can still employ staff. You get to keep all profits after you’ve paid tax but you’re personally responsible for any losses.
Choosing this option, you appoint people to run the company (‘directors’) and register (or ‘incorporate’) it with Companies House. Any profit made is owned by the company after it pays corporation tax. As a director of the company, you’re also an employee – so personal income and business income are separate when it comes to paying tax.
This is when two or more individuals manage the business but all the partners are equally and personally liable for the debts from the business.
So which one is right for you? Ultimately, whether you choose to trade as a company or an individual will depend on your unique business and clients, as some actually require that you’re a limited company. By figuring out which entity has the most advantages for you, you can save money on taxes and accounting.
For further information Gov.uk delves into each business type and the processes and liabilities involved.