The legal structure that you choose for your business will have an impact on many aspects of your new company. From record keeping to registration, how you form your company will impact that company in many ways. New business owners must choose how they want their company formed.
Before you make the decision on whether you should form a sole trader business, a partnership or a limited company, it is important that you understand the differences in these legal structures.
Sole trader businesses are the easiest to set up and require the least amount of paperwork. If you choose to own and operate a company on your own, you will only need to register with HMRC as being self employed.
There are fewer regulations that govern sole trader businesses and you are only required to fill out self assessment forms and your profits are treated as regular income when you file taxes. The one drawback with sole trader businesses is that you do not have protection. Limited companies offer limited liability to owners. This means that if and when a company goes under, owners are protected from losing personal property and assets to pay business debts. As a sole trader, you and you alone are responsible for paying business debts.
A partnership is one or more people going into business together. These types of business structures are very similar to sole traders. There is not requirement to file with Companies House although all partners and the partnership are required to be registered with HMRC. Partnerships are also not protected as limited companies are.
A limited liability company must be registered with Companies House and each owner must also register with HMRC as self employed. The most popular reason that business owners choose to form a limited company is because of the limited liability. The business is a separate entity, which means that it stands itself for business debt.
As an owner of a limited liability company, you are not personally held responsible for debts that they business may incur. If the business fails, the owners’ and directors’ liability are limited to the total amount of their investment into the business.
A limited liability company is a bit more complicated to set up than a sole trader business. You are required to have shareholders, directors and there is paperwork that must accompany your application to Companies House. The administrative requirements are also a bit more stringent. You are required to submit accounts to Companies House annually and the tax forms for limited companies are a bit more complex than they are for partnerships or sole traders.
This is not to say that it is difficult to form a limited company. In fact, the process is rather easy and can be completed in a day’s time if you choose to register your limited company online as opposed to via post. Limited companies do give you extra protection against debt, which for many is well worth the trade off of stricter regulations and more paperwork.