Through the financial year 2018/2019, 672,890 startup business were registered in the UK. Small to Medium-sized Enterprises (SMEs) account for 99.9% of the UK’s total businesses and are the driving force of the economy, generating around half the annual business turnover in the UK (estimated in 2020 to be around £2.3 trillion). So, in other words, if you’re thinking of starting a business, you most definitely won’t be alone.
However, before starting your own company, you’ll need to decide which type. In the UK, there are four main types of business to choose from, each with distinct advantages and drawbacks – particularly from the point of view of taxation, liability and administrative workload.
Sole trader
By far the simplest, easiest and quickest business type to register is that of the sole trader. As a sole trader, the business is entirely yours and you just need to register your intentions with HMRC for tax purposes.
All profits as a sole trader come directly to you – however, you will be liable for tax and national insurance, payable to HMRC. There is no cap on the amount sole traders can earn – however, it becomes less tax-efficient when you enter higher earning brackets.
It is essential to remember that, as a sole trader, you are personally responsible for all the businesses’ liabilities, including any debts accrued. This is perhaps the biggest drawback of operating as a sole trader as, if you find yourself in trouble, you will likely need to enlist the help of an Insolvency practitioner to advise you on rescue, recovery or liquidation options.
Partnerships
Partnerships consist of two or more individuals who agree to share in the profits and losses of a business. They are similar to sole trader companies in that the owners accept full responsibility for the costs, benefits and risks of running the business.
However, because there is more than one person involved in the running of the company, each partner is also liable for the other partners’ misconduct or negligence. In other words, you should be very sure of the integrity of other partners before starting this type of business.
Wages are paid from the profits of the company on an agreed ratio with each individual being responsible for their taxes and national insurance payments.
Limited Liability Partnerships (LLPs)
A Limited Liability Partnership is a special form of partnership where the liability of each of the partners is limited to the amount of money they invest. However, unlike a standard partnership, LLPs need to be registered with Companies House and HMRC. Partners sign an LLP agreement at the incorporation stage indicating their responsibilities and share of the profits. Tax and national insurance are paid annually via a Self Assessment Tax Return. LLPs can be formed with two or more members – and both individuals or companies can be considered as members.
Limited companies
A limited company is an independent legal entity run by directors and owned by its shareholders. A limited company is responsible for everything it does and has its own legal obligations and rights.
The finances of a limited company are entirely separate from its directors or shareholders and the profits it makes are considered its own (after paying Corporation Tax). Payments to directors and shareholders are made in the form of dividends. A limited company also has annual reports and filing responsibilities with Companies House and HMRC. There are numerous advantages to setting up a limited company, however, the formation process is more complex, costly and time-consuming.
