Your choice will affect how you run your business, what your personal liabilities are and how you run your accounts and pay your taxes.

In this section we cover off all the different options as well as highlighting the pros and cons for each. We’ve also included some related resources that cover considerations around VAT, and which looks at when and whether being VAT registered can be beneficial for your business.

Bitesize masterclass

Quick overview

What are the options available for your business and how can these be personally beneficial? In these sessions we will look at different types of business entities, their individual benefits, and the identity of your business.

There are many reasons people go into business. For some, it’s an opportunity to fulfil a lifelong dream; pursue a passion; try out a new idea. For others it might be a side hustle – perhaps earning from a hobby or to help top up the main income or it’s set up to help create and maintain a certain type of lifestyle. For others still it could be a means to give back, whether supporting others less advantaged, protecting the environment or providing opportunities to communities.

Whatever your reason for going into business, it’s important to think through how your business is registered and legally structured as this will affect a number of things for you moving forwards including: –

  • Where the financial liability sits if the business fails
  • Where the legal liability sits for the business
  • How you pay taxes and the level you pay
  • Your financial reporting responsibilities
  • What grants and other funding you might be eligible for

It can be a minefield. But the good news is that you don’t need a degree to work out which business structure is right for you. And even better, whilst we recommend you take advice from an accountant before jumping in feet first, you can set everything up yourself with relative ease.

To help you decide which is the best structure for your business, we’ve listed the most common forms of business registration below.

Registering your business

Unless you are a charity, social enterprises or community interest group, most businesses register as a sole trader, limited company or partnership. The following advice is taken from www.gov.uk/set-up-business

SOLE TRADER
What is a sole trader?

You run your own business as an individual and are self-employed

You can trade under your own name, or you can choose another name for your business. You don’t need to register your name. Sole trader names must not:

  • Include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’
  • Be offensive
  • Be the same as an existing trademark

 

You are personally liable for any losses with the business.

How to set up as a sole trader

You will need to register yourself as a sole trader with HMRC here

What are the legal responsibilities of a sole trader?
  • You must include your name and business name (if you have one) on official paperwork, for example invoices and letters
  • You will need to keep records of your business’s sales and expenses
  • Send a Self-Assessment tax return every year
  • Pay Income Tax on your profits and Class 2 and Class 4 National Insurance – use this calculator to help you budget Estimate your Income Tax for the current year – GOV.UK (www.gov.uk)
  • You must register for VAT if your turnover is over £85,000. You can register voluntarily if it suits your business, for example if you sell to other VAT-registered businesses and want to reclaim the VAT.
Your earnings as a sole trader
  • You don’t receive a salary or a wage – you simply ‘draw’ money from the business.
  • You’re taxed on the income that your business receives minus the allowable business expenses incurred.

Many prefer the option of trading as a Sole Trader as its simpler and cheaper. However this doesn’t mean that you shouldn’t follow best business practice and it is recommended that you:-

  • Set up a separate bank account for all your income and expenses. 
  • Set up a spreadsheet to record your income and expenditure each month (a template is attached)
  • Retain all your receipts in date order
LIMITED COMPANY
What is a limited company?

The business finances are separate from your personal finances. This means the company:

  • Is legally separate from the people who run it
  • Has separate finances from your personal ones
  • Can keep any profits it makes after paying corporation tax
How to set it up a limited company
  • You will need to find a suitable company name that has not been used (or is not too similar to one) elsewhere. You can check this here.
  • You will need a ‘registered address’ where official paperwork will be sent. This will appear on the public register and doesn’t have to be your trading address. Some accountants offer this service or you can purchase an annual address site from private companies.
  • You will need to nominate at least one Director and allocate shares.
  • You will need to check the Standard Industry Classification Code (SIC) which you can find here. 
  • You will need to agree and create the written rules of the company. There are standard Memorandum of Association templates available here.
  • You will need to register your company which you can do online here.
  • All the following apply to your company:
    • It is limited by shares
    • It uses standard articles of association ‘model articles’
    • It costs £12 and can be paid by debit or credit card or PayPal account
Legal responsibilities of a limited company
  • You must compile your financial records into a set of statutory accounts each year and file these with HMRC. Many people use an accountant for this, but there is financial reporting software (for example XERO, FreeAgent, Quick Books) that will run off the reports you will need for this at the touch of a button. Alternatively, you may choose to have an accountant prepare these for you.
  • You must file a company tax return – known as a Corporation Tax Return with HMRC each year and you will be required to pay tax on the profit the business makes
  • You must report and changes – for example new or departing directors; change of registered or trading address.
  • You must follow the Articles of Association that you will have agreed to when you set the company up.
Your earnings as a limited company

There are a number of ways that money can be legally taken out of a business. How you decide to do this does have implications on other support and benefits you may be entitled to, as many people discovered during the pandemic.

Salary and expenses

If you want to receive a salary then you will need to register your business as an employer and register yourself / your employees under the PAYE scheme. This means that you will draw a regular salary and pay income tax and national insurance contributions in the same way that you would as an employee to someone else.

You are eligible to claim back recognised expenses – for example petrol

Benefits in Kind

If you or an employee makes personal use of something that belongs to the company, this must be reported as a benefit and pay any tax due

Dividends

A dividend is a payment that can be made to a shareholder if the business is making a profit. Dividend payments must be recorded (date, name of company, name of shareholder and amount of dividend). Dividends need to be reported and are taxable to the shareholder if over £2,000

Directors Loan

If you take out of a company more than you put in, this is called a Directors Loan. These must be recorded and tax may be payable dependant on the situation of the loan account at year end.

Although there are more legal liabilities and costs involved in running a private limited company, you have the benefit of not being personally liable for any business debts. There are pro’s and con’s to the different forms of payment and it is recommended you speak with an accountant before deciding the best route for you.

PARTNERSHIPS
What is a partnership?

In a partnership, you and your partner (or partners) personally share responsibility for your business.

This includes:

  • any losses your business makes
  • bills for things you buy for your business, like stock or equipment

 

Partners share the business’s profits, and each partner pays tax on their share. A partner doesn’t have to be an actual person. For example, a limited company counts as a ‘legal person’ and can also be a partner.

You can set up a limited partnership to run your business. You must have at least one ‘general partner’ and one ‘limited partner’. General and limited partners have different responsibilities and levels of liability for any debts the business can’t pay. All partners pay tax on their share of the profits.

How to set up a partnership
  • You will need to find a suitable company name that has not been used (or is not too similar to one) elsewhere. You can check this here.
  • You will need a ‘registered address’ where official paperwork will be sent. This will appear on the public register and must be your main place of business.
  • You will need to choose a ‘nominated’ partner. This is the person responsible for managing the tax returns and keeping the business records.
  • You must have a general partner and a limited partner.
    • Limited partners contribute a sum to the business on set up; are only liable for debts up to the contributed amount; don’t run the business; are not allowed to withdraw their initial contribution
    • General partners are liable for all business debts; are responsible for running the business and can act on behalf of the business; are responsible for winding the business up
  • Each partner will need to register for self assessment. 
  • You will also need to register the business for self assessment.
  • You will also need to register your limited partnership.
Legal responsibilities of a partnership
  • You must report and changes – for example new or departing partners; change of address or business activities
  • You must include your name and business name (if you have one) on official paperwork, for example invoices and letters
  • The General Partner will need to keep records of your business’s sales and expenses
  • Both partners will need to send a Self-Assessment tax return every year. The General Partner will also need to submit a business self-assessment return
  • Each partner will Pay Income Tax on your profits and Class 2 and Class 4 National Insurance – use this calculator to help you budget Estimate your Income Tax for the current year – GOV.UK (www.gov.uk)
  • The General Partner must register for VAT if your turnover is over £85,000. You can register voluntarily if it suits your business, for example if you sell to other VAT-registered businesses and want to reclaim the VAT.
Your earnings from a partnership

Generally speaking, partners will agree drawings from the profits made in the business. These are recorded and reported in each individual’s self assessment return each year.

A partnership is the most straightforward way for 2 or more people to run a business together. You share responsibility for your business’s debts. You also have accounting responsibilities. However before you enter into any partnership, we recommend that you give careful consideration to your relationship with the partner(s) involved; the balance of skills and attributes; each partner’s values and goals. As the old adage goes ‘be careful when mixing business with pleasure.’

Business Legal Entity Masterclasses

In this first of two masterclass videos on business legal entity, Guy explains the different types of legal entities for a business and the advantages and considerations for each. By the end of this video you will have a clear idea which type of legal structure is most advantageous for you and your business.