While you may be able to change your business form in the future, your location may limit your options. This might lead to tax ramifications as well as an unintentional dissolution, among other issues, therefore it is essential that you take the time to think about the type of business structure you want for your company.
What is a Business Structure?
Who owns the firm, how revenues are dispersed, and which management executes which jobs are all determined by the corporate structure.
It's also required for tax and liability considerations since the firm will be taxed differently based on its structure, and managers and owners will have varying levels of accountability.
What are the most common Business Structures?
In the United Kingdom, there are four basic types of business structures, each with its own set of tax implications and responsibilities for both owners and shareholders. We’ll highlight a few options in the following list:
Limited Company
A limited company is a privately managed firm administered by its directors and owned by its shareholders. The corporation is a distinct legal entity with its own set of legal rights and responsibilities. This means that the company is in charge of all it does, and its finances are distinct from the owner's personal problems (s).
After paying Corporation Tax, the corporation keeps whatever earnings it generates. The gains can only then be paid to shareholders as dividends. Restricted firms can be limited by shares or by guarantee, as discussed further below.
As a limited company director, you will be subject to income tax on your salary as well as any profits you receive.
You'll also have to contribute to Class 1 National Insurance (NICs). In addition to this, the earnings made by the firm will be subject to the payment of 19% towards Corporation tax.
For more information on which business structure you’d like to adopt for your own business, visit our blog on, “The best move for your business: Sole Trader or Limited Company?”.
Partnership
By forming a partnership, you may share the costs, duties, and hazards of running a firm with one or more others. A partnership, unlike a limited corporation, has no legal character; it is simply a vehicle that connects two or more self-employed persons in a simple commercial structure. Unless the partnership agreement specifies otherwise, the revenues and benefits of the partnership are divided among the partners.
Both the partnership and each partner must register as self-employed and complete and submit a self-assessment tax return to HMRC.
You will be obligated to pay taxes and national insurance payments on your part of the earnings. Each spouse is responsible for paying his or her own taxes and social security contributions.
Sole Trader
The easiest legal structure for your company is to become a sole trader, as it requires less form completion and you don't have to file accounts with Companies House. All you have to do now is notify HMRC of your intention to work for yourself and register your business name.
As a sole trader, you are the single owner of your firm, and you get to retain all of the earnings after taxes. Because the law does not discriminate between you and your business, if the latter becomes insolvent, you will be responsible for all legal and financial consequences.
Every year, you must register for self-assessment with HMRC and file a tax return. Profits will be taxed like income, and you'll need to keep track of your business's income and costs.
You must also pay fixed-rate Class 2 National Insurance payments (NICs) regardless of whether or not you make any profits, as well as Class 4 National Insurance contributions on any profits that your company has made.
Choosing a business structure may be a difficult task, especially if you are aware of additional tax and legal obligations. However, this is a critical first step toward your company's success, and adopting the right business structure helps guarantee that your company operates legally and efficiently.
We understand the obstacles and difficulties that all business owners face on a daily basis at Persona Finance, and we try to deliver even more value by providing them with the most critical remote accounting services. For more information on how we can help your business, please contact us now at [enquiries@personafinance.co.uk].
