Types of business ownership

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Types of business ownership

If you’re planning on keeping your business small, then sole trading or a partnership could be for you. But if you’re thinking a little bigger, then a private or public limited company might be the way forward. And there are other options…

Self-employed or sole trader

This is the simplest of all the different types of ownership. You – and nobody else – are responsible for your business, so you get to make all the decisions (try not to let the power go to your head). That doesn’t mean you have to be lonely, though – you can employ other people.

The pros and cons

You’re your own boss, so you get to keep all your profits after tax. But you’re also responsible for paying that tax. So although there’s less paperwork than other types of business, you’ll need to register for self-assessment with HMRC, and fill in the dreaded tax return each year. Then you’ll pay income tax on the money you make, and National Insurance contributions.

There’s no legal distinction between you and your company, which means you’re liable for any business debts. So if things go wrong, you could end up having to pay them from your personal savings.

Find out more about being a sole trader.

Business partnership

If you want to start your own business but you’re not keen on being Billy No-Mates, then a partnership could be for you.

The pros and cons

It sounds obvious, but you’ve got to make sure you get on well with your partner or partners (you can have more than one). That’s because you’ll both get to keep all your profits after tax – so you don’t want to end up giving half your hard-earned cash to someone who’s only doing a tenth of the work. And remember that if the business doesn’t go the way you want it to, you’ll both be liable for any debts, which you might have to pay out of your own pockets.

Once you’ve found your perfect partner, you’ll need to choose one of you to be ‘nominated partner’ (no fighting). It’ll be their responsibility to register the business with HMRC (you don’t need to register it with Companies House) and send in the partnership’s tax return. Then you’ll both need to sign up for self-assessment so you can pay your own tax and National Insurance.

Limited liability partnership (LLP)

An LLP falls somewhere between a traditional partnership and a private limited company.

The pros and cons

You and your partners will need to register your LLP with Companies House. Like a traditional business partnership, the law sees LLPs as separate from their owners – so they can own property and have debts. The owners are partners, and jointly responsible for managing the business, including deciding how to distribute profits between them. There are no shares or shareholders.

HMRC treats all the profits your company makes as earnings for you and your partners which you pay income tax on. So you’ll all need to register as self-employed with HMRC and fill in a tax return each year. And you might end up paying more than you would if you formed a limited company.

When you start your LLP, you and your partners will agree each person’s individual liability. That means that if the business goes belly up you won’t be responsible for all the company’s debts (unlike in a traditional partnership) – only what you agreed when you started out.

Private limited company

Even if you’re super-confident about your new product or idea, you might still want to limit the amount you’ll have to pay if you get into a financial hole. That’s where private limited companies come in.

The pros and cons

Private limited companies are legally separate from their owners. if that brilliant business idea you had turns out to be not-so-great, your savings are safe – you won’t have to pay any business debts from your own pocket.

The company will pay corporation tax on profits, so you could end up paying less income tax. You also get more tax-deductible allowances and costs.

The downside is that there’s a bit more paperwork involved in setting this up (although a formations agent can do it for you). And you’ll also need to file statutory annual accounts and a company tax return.

Find out more about private limited companies.

Public limited company

This is very similar to being a private limited company, except you can now sell shares to the public (although you’re also free to keep them all for yourself).

The pros and cons

Your company is a separate legal entity, so you won’t be personally responsible for any business debts.  And you get the same tax benefits as private limited companies – you pay corporation tax on profits and get more tax-deductible allowances. You’ll also need to do the same amount of paperwork to get set up, including filing statutory annual accounts and a company tax return. And you’ll need to have at least two shareholders and issue shares worth £50,000 (or more).

If that all sounds a bit scary, you can become a private limited company then change to a public one further down the line (and vice versa).

Find out more about public limited companies.

Franchise

You trade under an established brand. So someone else will already have done all the admin and set-up stuff involved in starting a new business from scratch.

The pros and cons

If you don’t want to take on any of the risks of starting out on your own, a franchise could be good for you. You’ll be working under a well-known name, with a ready-made model. But this also means you’ll have little or no control over the direction the business goes in. Or the money you make.

In a nutshell

If you want to stay small and don’t have many risks, be a sole trader. If you have business partners, an LLP will probably suit you best. If you’re planning to start with a bang and get investment from the public, it’s a public limited company. And if you want brand recognition from the outset and don’t mind giving up some control, choose a franchise. But for most people setting up a new business, the best structure is a private limited company, because it’s easy to give shares to important employees and you won’t personally owe money if the business goes bust.

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