When you’ve come up with a business idea and you’re ready to give it a go, it’s the beginning of an exciting process. But when you’re just starting out, even the basics can seem like huge decisions. One of the first things you need to decide is what sort of business you’re going to start trading as. Although you can change this later, you want to start off using the right business structure for your needs. For example, if you mostly work alone providing a professional service, you’re likely to begin as a sole trader. But you might find later that your business has grown or perhaps you want to go into partnership with someone else. And a limited company could be more appropriate for you. To help you decide which business structure to start off with, have a look at the information below.
The most simple business structure is that of a sole trader. As a sole trader, you run your business as an individual. Being a sole trader doesn’t mean you have to work alone, however, and you can employ staff. As a sole trader, you need to keep your business finances separate from your personal finances. You’ll need a business bank account as most personal accounts don’t allow you to deposit business funds. Using a business account makes it easier to separate your finances and show proof of them to HMRC. As a sole trader, you are personally responsible for any losses your businesses makes. Your responsibilities include filing a self-assessment tax return every year. You also need to pay income tax and national insurance. You also need to register for VAT if you make over a certain amount (£81,000 in 2014).
If you want to separate your personal and business finances, you can set up a limited company. To do this, you must be have at least one director and at least one shareholder. The director and shareholder can be the same person. All limited companies have to complete registration (or incorporation) with Companies House. As well as a director and shareholder, you need a company name that must follow certain rules. You also need to register details about the company’s shares and written rules about the running of the company. A limited company needs to put together statutory accounts. They must send an annual return to Companies House and send HMRC a Company Tax Return. The same rule for VAT applies, and directors have the same tax responsibilities as a sole trader.
There are several types of partnership. They include ‘ordinary’ partnership, limited partnership and limited liability partnership (LLP). In an ordinary partnership, you share responsibility and profits for the business with your partners. You are responsible for your share of losses and expenses. If you don’t want to be personally responsible, you can consider a limited partnership or limited liability partnership. A nominated partner must complete an annual partnership self-assessment tax return. Each partner must complete a self-assessment tax return, and pay income tax and national insurance.