How to choose the right structure for your business - Our Guide
Selecting the right business structure is a crucial step of launching a business. It dictates the people who are financially and legally liable, the amount of paperwork that needs to be filed, the way taxes are paid, and the manner in which profits are distributed.
If you are in the beginning stages of getting a business up on its feet, selecting the appropriate structure is crucial. Before doing so, though, you need to know what each type entails.
What Are the Types of Business Structures?
1. Sole Proprietorship
This type of business structure is the simplest and the most common. It means that your business is owned entirely by you. You have full control over your business, and any profit that the business makes after-tax is yours to keep. However, keep in mind that you will bear all the financial and legal responsibilities if your business runs into trouble.
To register your sole proprietor business, you don’t have to fill out lots of forms or file many accounts with Companies House. All you have to do is to inform HM Revenue and Customs (HMRC) that you intend to be self-employed then register your business name.
Registering as a partnership is a simple and flexible way for two or more people to own and run a business together. It lets you share the responsibilities, costs, and risks with one or more people. The profits of gains are shared among the partners, with the amount depending on their contribution. Since you have one or more co-owners, you get the support, motivation, and encouragement you need to run your business more effectively.
3. Limited company
A limited company is a separate legal entity to its directors. Owning a business with this type of structure means you are not legally or financially responsible for the business. If something goes wrong, creditors can seize assets from the business but not from you.
Setting up a limited company is less risky because it provides limited liability. It is also easier to raise finances and can be more tax-efficient because the profits belong to the company. That said, it can be more costly.
As for taxes, you have to pay Class 1 National Insurance contributions (NICs) and income tax on the salary you draw. You will also get taxed on any dividends you receive. If you are unfamiliar with this, you can always seek top-notch accountancy services.
How Do I Know Which Is the Right Structure for My Business?
To choose the structure that perfectly suits your business, you must consider the following:
If you are a sole proprietor, all profit you make is considered your personal income and will be taxed accordingly. Individuals in a partnership also claim their share of the profits as personal income. Corporations, on the other hand, file their own tax returns every year. Seeking a company that specializes in accountancy services for business can help you handle your taxes correctly.
Being a sole proprietor makes you fully liable for your business, while partnerships share the liability between the partners. A corporation, on the other hand, carries the least amount of personal liability.
If you want full control over your business and its activities, a sole proprietorship might be your best option. You can also negotiate your control in a partnership business. Meanwhile, a corporation comes with a board of directors that have the final say about the company.
The type of business structure you choose has financial and legal implications in your business, which is why you have to consider all your options and pick the best one that suits your needs. Consider working with an accounting firm like us for guidance.
Make us your accountancy partner. We are an accountancy firm that offers comprehensive startup company services in England. Schedule a consultation today.