Choosing the right business structure
Friday, 14 September 2018
Is your current business structure still right for you? Circumstances may change so it’s important to review your structure from time to time. In recent years, the driver might well have been saving ‘tax’, which prompted many businesses to become limited companies. Whilst there are certain levels of profit where that is still the case, I’m now talking to clients and potential clients about other reasons for forming a limited company.
Potential new structure for sole traders
One of the major reasons for trading through a limited company is the protection that it gives your personal assets, particularly your private residence. However, sole traders should also be able to have that protection. It’s therefore pleasing that the Office of Tax Simplification (OTS) is calling for further work on the potential for a new form of trading vehicle; the sole enterprise with protected asset (SEPA) – a bit of a mouthful! Perhaps they will come up with a simpler name in due course.
The OTS work stemmed from research suggesting that the main reason for forming a limited company was to obtain limited liability protection, but that many struggled to meet the additional reporting requirements. A SEPA would allow traders to protect their primary residence, while continuing to trade as a sole trader, and would simplify the tax and accounting requirements.
Whilst recognising that the proposed structure of a SEPA may bring potential issues, the OTS believes these are not insurmountable. There would be a light touch reporting regime, requiring a description of the business and the address of the property covered. Aspects of the register would be public, for consumer protection reasons, but not to the extent of identifying the asset. The OTS also suggests further considerations to protect other assets, principally the trader’s pension fund.
The consultation indicated that the SEPA model is likely to appeal to traditional trades and probably from those in their 40’s and 50’s who are starting a new venture, and are more likely to have property that they wish to protect.
A quick recap of the current possibilities:
A sole trader is self-employed, must be registered with HM Revenue & Customs (HMRC) for self-assessment, and is responsible for running their business and meeting legal requirements. A sole trader can employ people, and must have the appropriate PAYE scheme and employer pension arrangement in place. Income tax and National Insurance is paid on profits generated. The owner of the business is entitled to keep all profits but is liable for all losses.
You and your partner(s) share responsibility for the business. Partners share the profits and pay tax on their share.
A partner does not have to be an actual person. For example, a limited company can also be a partner. The partnership requires a name, a nominated partner (who is responsible for managing the partnership’s tax returns and record keeping) and needs to register with HMRC. Best practice is to have a partnership agreement detailing profit splits and what happens if a partner wants to leave.
Individual partners also need to register as self-employed, and submit their own tax return. Usually all partners are jointly responsible for all debts of the business.
Limited Liability Partnership (LLP)
In this legal structure, the number of partners is not limited, but at least two have to be designated members responsible for filing annual accounts.
As with a limited company, the LLP protects members’ assets, limiting their liability to the amount invested and any personal guarantees given. As with an ordinary partnership, each member must register with HMRC as self-employed, with their share of profit taxed as income.
A private company is a separate legal entity, and limited by shares. The shareholder’s liability is limited to the amount they originally invested. Company directors run the company on behalf of the shareholders, although you can be both director and shareholder.
The company must be registered at Companies House and with HMRC. The company pays corporation tax on its profits.
There are other business legal structures that might be an option, including companies limited by guarantee, community interest companies and cooperatives, but, as always, consult your usual professional advisor before proceeding.
As always, if you have any queries or would like more information, you can contact me on 01473 833411 or firstname.lastname@example.org