Starting a business in the United Kingdom, Limited Company, Partnership or Sole Trader
YOU HAVE TO SELECT THE TYPE OF BUSINESS YOU WANT TO BE
There are advantages and disadvantages of each type of company when you go into business in the United Kingdom, but you have to select the type of business to be.
Advantages of being a Sole Trader
· Setting up is quick and easy, speak to HRMC for tax advice and set up a bank account. A number of Banks seem to be offering really advantageous deals on business bank accounts.
· You are the owner and manager – you live by the effectiveness of your decisions rather than others
· You keep minimum records and simple unaudited accounts- if you are not much good at keeping records and plan a small business probably without employees this is for you!
· Unless you are a high earner, your total income tax payments can be less than if you were a limited company
· You own all the profits ( yours to do with as you want)
Easy to wind up – if its not gone well, if you get a good job offer just tell HMRC and they will ask for closing details and help you calculate any tax due.
Disadvantages of being a Sole Trader
· You are responsible and liable for all your business debts so all your assets (including your house if there is any equity in it) are at risk
· You suffer all losses – if there is not enough money to pay you a wage that week, you don’t get paid
· You are entitled to fewer socialsecurity benefits- check with HMRC what your level of contributions entitles you to
· Your options for raising money are limited- you might have to put up your house as collateral for loans
· Its harder to sell the business or pass it on- check out any tax implications with HMRC
· You pay normal income tax rates om your business profits – watch the chancellor he will change tax rates this year
· Your’e on your own- no one to share decision taking with.
PARTNERSHIP- COULD BE FOR LIFE?
A partnership is where more than one person enters business together. The partnership has all the advantages and disadvantages as above but a few more as well
Advantages of a partnership
· You have a bigger skill base- may be good if one of you is practical and one of you has marketing skills
· You may have more initial capital- this may mean that you don’t have to put quite so much into your business
· You may be able to raise money by introducing new partners- if you need money to develop consider someone else coming into the business and investing although they will expect to take drawings out of the business as well!
Disadvantages of partnership
· Each partner is personally liable for all the business debts of the partnership even if another partner caused them- so if your other partner makes a series of bad decisions and you have money in the bank and he has not- you could lose it
· It can be difficult to make a partnership to work- people are different they have different goals and aspirations so if you are not in tune with each other you many have arguments over decisions which distract from the function of the business.
· There can be legal costs involved in setting up a partnership agreement- but it could be a costly short cut to go without.
LIMITED LIABILITY PARTNERSHIPS
Limited Liability Partners
Advantages of a Limited Liability Partnership
· Members can limit their liability for losses, although personal liability can arise in a similar way to limited companies
· It gives the organisational flexibility of a partnership.
· The members agreement is confidential
· It’s taxed as a partnership- tax is charged on all the profits, whether or not they have been distributed to members.
Disadvantages of a Limited Liability Partnership
· Annual accounts must be prepared and filed- this is an extra cost
· Withdrawals for the previous two years may be clawed back by a liquidator if the limited liability partnership is declared insolvent.
· A limited liability partnership has to be registered with Companies House which involves extra cost
· It is important to draw up a suitable members agreement- this may involve a solicitor and extra cost
As in the name this is where your liability for debt is limited but you are treated as an employee rather than the owner of the business.
Advantages of a Limited Company
· It is easier to raise large sums of money for the business or sell part of it- the business is divided into shares which can be valued and sold to an interested party
· You can keep your wages low to minimise personal income tax. Currently dividends paid by companies attract a lower rate of income tax.
· You can take other money you need as dividends
· Loans are business losses rather than personal losses.
Disadvantages of a Limited Company
· There are fees involved in setting up a limited company
· Forming the company will involve completing paperwork- you may need the help of a solicitor or accountant who will charge for their service.
· You must keep formal accounts that will need to be filed with Companies House- these will have to be audited by an accountant and again they will charge for this service
· National Insurance payments are higher because you are an employee.
· If you decide to stop trading it can be difficult and expensive to wind up the company
STILL NOT SURE
Still not sure? Get some professional advice. It will cost you fees now but it might save you money in the future!