Starting a Business - Three common options
Posted on 27th September 2024 at 13:03
The consideration given to the structure of any new business can be vital for it's success and profitability. So many times we are approached three or four months down the line after a business has started and the owners have concluded that they have taken the wrong route. At Brilliant Accountants in Milton Keynes, we believe every business should have the opportunity to succeed, so we're here to highlight the main benefits of the various options you have when starting a new business . Running a new business in Milton Keynes can be demanding, especially with the many responsibilities and tasks involved.
Types of business structure
The three most common types of business structures are;
Sole Trader/Sole Proprietor/Self Employed
Partnerships
Limited Company
Each come with pros and cons.
What is the best option for you and any other proposed colleagues will very much depend on personal circumstances.
Sole Trader/Sole Proprietor/Self Employed
Key Features of a Sole Trader/Sole Proprietor/Self Employed:
• Single Ownership: The business is owned and managed by one person. The owner is responsible for all aspects of the business, including decision-making, operations, and finances.
• Unlimited Liability: The sole trader is personally responsible for all debts and liabilities of the business. This means that if the business incurs debt or is sued, the owner's personal assets (such as a house or car) can be used to satisfy business debts.
• Taxation: The income generated by the business is considered personal income. The business profits are taxed at the owner’s personal income tax rate. There is no separate business tax return; the business income is reported on the owner's individual tax return.
• Control: The sole trader has complete control over the business. They make all decisions without needing to consult partners, shareholders, or a board of directors.
• Ease of Setup and Operation: Setting up as a sole trader is straightforward and involves minimal legal formalities and paperwork compared to other business structures like corporations or Partnerships. LLC's. It may only require registering with HMRC for Self Assessment https://www.gov.uk/self-assessment-tax-returns
• Business Continuity: The business is closely tied to the individual owner. If the sole trader dies, becomes incapacitated, or decides to stop operating the business, the business typically ceases to exist unless arrangements are made to transfer it to another party.
Advantages of Being a Sole Trader:
Simplicity: Easy to establish and operate, with minimal regulatory requirements.
Direct Rewards: The owner keeps all the profits after taxes.
Full Control: The owner makes all decisions and does not have to share control with others.
Disadvantages of Being a Sole Trader:
Unlimited Liability: The owner’s personal assets are at risk if the business fails or faces legal action.
Limited Resources: Raising capital can be more challenging as the sole trader may rely mainly on personal savings or loans.
Workload: The sole trader is responsible for all aspects of the business, which can be overwhelming.
Business Continuity Issues: The business's future is closely tied to the owner’s ability to manage it.
Tax liabilities are often higher than other structures such as Limited Companies
Partnerships
There are two main types of partnerships. The most common being an ordinary/traditional one which often sees two, three or four individuals joining together, pooling resources and skills and trading under one banner.
Key Features of an ordinary/traditional partnership:
This structure allows for shared decision-making and the pooling of resources, fostering collaboration and innovation.
The partnership includes joint liability, where partners are jointly responsible for debts and liabilities, and profit-sharing, which typically aligns with each partner's contribution to the business. Additionally, a partnership is relatively simple to establish, with minimal regulatory requirements compared to limited companies.
Advantages of an ordinary/traditional partnership :
• Strength in numbers: Partners able to freely collaborate and brainstorm.
• Simplicity: Easy to establish and operate, with minimal regulatory requirements.
• Shared liabilities: Partners are jointly responsible for debts and liabilities.
• Shared Profits: The profit the partnership makes is split among the partners allowing some flexibility dependant upon the partners agreed percentage.
Disadvantages of an ordinary/traditional partnership:
• Joint and Several Liability: Partners are jointly and severally liable for the partnership’s obligations. This means that each partner can be held responsible for the entire amount of any business debt or legal claim, even if another partner was the one who incurred it.
• Limited Resources: Raising capital can be more challenging as all partners personal credit rating will be considered by any lenders.
• Disagreements and conflict: Too many cooks can spoil the broth and all that!
• Tax liabilities are often higher than other structures such as Limited Companies
At Brilliant Accountants, we offer tailored advice to help you determine the most suitable structure for your business, ensuring you can focus on what you do best. Whether you're based in Milton Keynes, Bedford, or Northampton, our expert team is here to assist you on your entrepreneurial journey.
LLP Partnerships
LLP (Limited Liability Partnerships) are basically a more legally structured version of an ordinary/traditional partnership. They are popular with certain professionals such as Solicitors, Accountants and Architects. An LLP, or Limited Liability Partnership, is a type of business structure that combines elements of both partnerships and corporations.
Key Features of an LLP:
Limited Liability: In an LLP, the personal assets of the partners are generally protected from the debts and liabilities of the business. This means that if the LLP faces financial trouble or legal claims, the partners are not personally liable beyond their investment in the LLP.
Flexible Management: Unlike corporations, which have a rigid management structure with a board of directors, LLPs allow partners to manage the business directly. The terms of management are typically outlined in a partnership agreement.
Taxation: LLPs are often treated as pass-through entities for tax purposes. This means that the LLP itself is not taxed on its income. Instead, profits and losses are passed through to the partners, who report them on their personal tax returns.
An LLP must have at least two partners: who can be individuals or entities. Partners in an LLP can participate in the management of the business without risking personal liability for the LLP's obligations.
Legal Framework: The specific rules and regulations governing LLPs vary by jurisdiction, but generally, they are formed through a formal registration process and are subject to ongoing compliance requirements, such as annual filings and fees.
Get your business structure right first time - Make the Smart Choice for Your Business
Starting a business is a challenging yet rewarding journey. But to truly succeed, you need the right support, and that’s where an accountant comes in. From financial planning and tax compliance to cash flow management and administrative support, an accountant can be an invaluable asset in helping your start-up grow.
If you're in Milton Keynes or the surrounding area, and you're looking for an accountant who can help you not only manage your finances but also drive your business forward, get in touch with us today. Let’s work together to make your start-up a success.
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