Which Company Formation is Right For You?

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You are poised and ready with a new business idea and are ready to start taking the next steps in your business journey. 

A few times in life, you might feel you are fulfilling your passion, and launching a company is one of them. 

The feelings and long nights involved with the ideation, creation, product sourcing, and other moving parts for your new business give you a buzz. 

Motivation and ideas arriving in the middle of the night as your business slowly takes shape. 

Coming up with business ideas is one of the most enjoyable brainstorming sessions you’re likely to have. 

But, there might be a few moments that need some research, sometimes some professional advice and support. 

One of the most common considerations that usually takes a short while to arrive at an answer is the legal structure of your business. 

Each of the formations has different tax requirements and offers different levels of personal asset protection. 

The four mains types of business structure in the UK are:

  • Sole trader
  • Partnership
  • Limited Company 
  • Limited Liability Partnership

Starting with the wrong formation can cause a couple of kinks in an otherwise smooth process. Still, it is possible to change your company formation, for example, becoming a limited company from an LLP

Let’s take a look at the formations and what they mean. 

Sole Trader

One of the most simple formations. Registering a sole trader takes a few minutes and gives you the right to earn money for yourself. This is also known as being self-employed. 

You run the business, and you are now required to submit tax returns and other business information when requested. 

Being a sole trader entitles you to keep all of the profits your business makes as income, so long as you manage your national insurance and taxes, correctly there are rarely any issues. 

When you hit a higher profit margin, the sole trader does become less tax efficient. 

Two things to note are:

  1. If you aren’t great with numbers or accounts, hire an accountant. This is the only way to ensure your finances are in order and you claim all of the benefits and deductions correctly. 
  2. You are now responsible for all liabilities, including personal assets and those you have joint ownership of. 

Partnership

You and a business partner (or more) will decide to share the ownership of a business. A partnership means you share the losses and the profits too. 

All of the costs, benefits, responsibilities, and risks are shared across all of those in the partnership. 

The partners are classed as self-employed and might be referred to as an unincorporated entity. 

One of the most critical points is that all partners are responsible for any misconduct or negligence of another partner. 

Partners are personally responsible for the losses and debts of the business. 

An agreement will be drafted to outline the profit-sharing ratio, and the partners pay taxes individually on their share of the profits. 

Limited Company

A limited company might sound complicated, but it is usually one of the best company formations to protect personal assets – and run as a general business. 

A limited company is a privately managed business owned by shareholders but run by the directors. 

As mentioned before, one of the biggest perks is that the company itself is responsible for everything it undertakes, and personal finances and assets remain separate. 

The flow of cash is slightly different too. The profit that is generated is retained by the company, and the company pays corporation tax. After the tax is paid, the profits can be delivered to shareholders (as dividends).

Limited companies also have to adhere to the annual reporting and other filling requirements from HMRC and Companies House. 

The reason people choose this formation are:

  • You can claim back expenses on the business
  • Your brand is protected
  • The company retains the profit that is generated can retain the profits
  • If you hold the controlling share, you can decide on any remuneration packages.

Limited Liability Partnership (LLP)

A limited liability partnership is very similar in most ways to a partnership, except that the partner’s liability is limited to the amount of money they invested in the company. 

An LLP is required to be registered at HMRC and with Companies House, and you will be required to file annual accounts. 

Interestingly an LLP can be incorporated with two or more members, and those members can be a company or an individual. 

An LLP agreement outlines the responsibilities of the members, how the sharing of profits will work. All members will be required to submit a self-assessment tax return each year, plus pay tax on their share of the partnership’s profits. 

A professional company should handle anything beyond a Sole Trader registration since the forms need to be completed correctly, and inaccuracy can cause issues later. 

But when you’ve launched, it’s time to go all out on growth: 10 Tips to Get Your Business Booming. 

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