So, you’ve done the difficult bit. You’ve had that bright idea. Something that can work, and something that you want to pursue. But how do you formally create the business?
When starting up a business, it’s important to think about how you want your new adventure to look, and where you may want to take it in the future.
A business can be structured in several ways, and they each come with their own pros and cons. What may be of benefit to one business, might hinder, or simply be irrelevant, to another.
What are the common structures?
For a sole trade business, the proprietor is the business, there is no separate legal entity.
Business affairs can be kept private and, in a way, simple. Risks and rewards are taken on solely by the proprietor, meaning increasing profits and growth are significant incentives, while the potential risk of legal or financial issues will equally be a concern. Borrowing is taken out in the name of the individual and no limited liability is given from personal assets.
However, the administrative burden of a sole trade is significantly less than that required of a limited company. Accounts are not made available to the public and no annual submissions and registers are necessary.
Profits from a period will form part of an individual’s tax return to 5 April each year, which must be filed by the following January. As the individual is not taxed on monies “drawn” from the business, but from the profits generated, it can lead to a lack of flexibility with regards to tax liabilities.
A partnership is like a sole trade in the sense that the proprietors are the business, although in this instance more than one person is entitled to share in the profits. The profits generated by the partnership are split between the partners and each partner’s share is then taxed annually on their individual tax return.
The pros and cons of a partnership are therefore generally the same as a sole trade business.
A partnership can benefit from shared expertise, experience and responsibility, and is a common set-up amongst the professional services sector. It can also be a great way to share your business with others that you’d benefit from with working with and share the risks and costs of running a business.
More flexibility can be used in the sharing of profits and, ultimately, the tax paid on these profits by each partner. This can simply be based on a partner’s individual input but could also be used to benefit from family distribution, available allowances, and a whole host of other tax planning.
A limited company is a separate legal entity to its shareholders.
If a limited company finds itself in financial difficulty, the risk lies with the company, and shareholders personal assets are only at risk where personal guarantee has been offered.
A company will have owners (shareholders) but will also need to register management (directors) at Companies House. These could be the same people, but could also separate ownership with those trusted with running the day-to-day business. Each of whom will have different rights and responsibilities.
Shareholders are taxed on dividends voted by the company, which in most cases come with more tax favourable rates than salaries. If they also have an employment contract as a director, they can extract money as a salary, giving greater flexibility on profit extraction.
Companies qualify for many tax schemes which individuals do not, such as Enterprise Investment Scheme (EIS), Research & Development (R&D) reliefs and grants amongst many others. For example, EIS schemes allow new companies to raise funds through the investment of individuals who in turn receive significant tax advantages, whilst R&D relief allows most companies to claim an additional 130% of the costs involved in developing new products. These have been particularly successful for growing businesses in the Tech sector
However, consideration needs to be given to potential drawbacks, such as a significantly larger admin burden, requirement for public disclosure of company accounts and increased difficulty in obtaining funding in some instances as no personal guarantee.
Limited Liability Partnership (LLP)
It is simplest to look at an LLP as a hybrid of a partnership and a limited company. Members are still taxed using their own profit share and through their own tax return.
As with a limited company, the personal assets of the members are generally protected from the business’ liabilities and the LLP accounts will be on public records with Companies House.
What is the most common structure for a business in the Tech sector?
The most common choice of structure for a new business, and the one we most often recommend is a limited company.
Why is this?
To put it simply Tech business are on the whole innovative and fast growing. As such they will want to benefit from R&D tax relief, and access finance from investment that qualifies for EIS relief and Grants.
Limiting personal liability is also a factor in this decision making. Instinctively, people want to protect themselves and their families from the unpredictability of business fortunes (or misfortunes), and therefore a limited company affords them the comfort of knowing their house and their belongings are “off the table”.
How can Bishop Fleming help you?
If you would like to discuss your new business, or restructuring your current one, please do not hesitate to get in touch and we would be delighted to help.
New ventures can be scary, but we can be there with you every step of the way.
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