Forming your Business - the Structures!
Forming your Business - the Structures!
To put your business on a proper footing with HM Revenue & Customs and other authorities, you need to make sure that it has the right legal structure. It's worth thinking carefully about which structure best suits the way that you do business, as this will affect:
- the tax and National Insurance that you pay
- the records and accounts that you have to keep
- your financial liability if the business runs into trouble
- the ways your business can raise money
- the way management decisions are made about the business
Self Employed:
To be a sole trader, a partner, or a member of a limited liability partnership as an individual rather than a company, you must be self-employed and registered as such with HM Revenue & Customs (HMRC). This does not mean that you can't also do other work as an employee, but the work you do for your business must be done on a self-employed basis.
If you are not sure whether this work counts as self-employment, ask yourself these questions:
- Do you present your clients with invoices for the work that you do for them?
- Do you carry out work for a number of clients?
- Are you responsible for the losses of your business as well as taking the profits?
- Can you hire other people on your own terms to do the work that you've taken on?
- Do you have control over what work has to be done, how the work has to be done and the time when and place where the work has to be done?
- Have you invested your own money in your business or partnership?
- Do you provide any major items of equipment which are a fundamental requirement of the work you carry out?
- Do you have to correct unsatisfactory work in your own time and at your own expense?
Sole Trader:
Being a sole trader is the simplest way to run a business, and does not involve paying any registration fees. Keeping records and accounts is straightforward, and you get to keep all the profits. But you are personally liable for any debts that your business runs up, which can make this a risky option for businesses that need a lot of investment. As a sole trader, you are personally responsible for any debts run up by your business. This means your home or other assets may be at risk if your business runs into trouble. You have to make an annual self assessment tax return to HMRC. You must also keep records showing your business income and expenses.
Partnership:
In a partnership, two or more people share the risks, costs, and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.
Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved but the business may not need to cease.
A partnership is a relatively simple and flexible way for two or more people to own and run a business together however, partners do not enjoy any protection if the business fails.
To set up each partner needs to register as self-employed. It's a good idea to draw up a written agreement between the partners. For further advice, consult an accountant or solicitor.
Partners themselves usually manage the business, though they can delegate responsibilities to employees. Partners raise money for the business out of their own assets, and or with loans. It's possible to have 'sleeping' partners who contribute money to the business but are not involved in running it. The partnership itself and each individual partner must make annual self-assessment returns to HM Revenue & Customs (HMRC). The partnership must keep records showing business income and expenses.
In England, Wales and Northern Ireland, partners are jointly liable for debts owed by the partnership and so are equally responsible for paying off the whole debt. They are not separately liable, which would mean each partner is responsible for paying off the entire debt.
Limited Liability partnership:
A limited liability partnership (LLP) is similar to an ordinary partnership - in that a number of individuals or limited companies share in the risks, costs, responsibilities and profits of the business.
The difference is that liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. This means that members have some protection if the business runs into trouble.
There is no restriction on the number of members, but at least two must be designated members - the law places extra responsibilities on them.
If the LLP reduces in number and there are fewer than two designated members then every member is deemed to be a designated member. LLPs must register at Companies Registry. It's a good idea to draw up a written agreement between the members. For further advice, consult an accountant or solicitor.
Limited liability companies:
Limited companies exist in their own right. This means the company's finances are distinct from the personal finances of their owners.
Shareholders may be individuals or other companies. They are not responsible for the company's debts unless they have given guarantees. However, they may lose the money they have invested in the company if it fails.
Main types:
Private limited companies can have one or more members, eg shareholders. They cannot offer shares to the public.
Public limited companies (plcs) must have at least two shareholders and can offer shares to the public. A plc must have issued shares to a value of at least £50,000 before it can trade.
Private unlimited companies - these are rare and usually created for specific reasons. It is recommended you take legal advice before creating one.
To set up a limited company one must be registered (incorporated) at Companies Registry. You must have at least one director (two if it's a plc) and a company secretary, who may also be shareholders. In a plc, the company secretary must be professionally qualified. From October 2008, it will no longer be necessary for private limited companies to have a company secretary.
A director or board of directors makes the management decisions. Finance comes from shareholders, borrowing and retained profits. Public limited companies can raise money by selling shares on the stock market, but private limited companies cannot. Accounts are filed with Companies Registry. Profits are usually distributed to shareholders in the form of dividends, apart from profits retained in the business as working capital.
Companies pay corporation tax and must make an annual return to HM Revenue & Customs (HMRC). Company directors are employees of the company and must pay Class 1 National Insurance contributions as well as income tax on their salaries. If your company or organisation has any taxable income or profits, you must tell HMRC that your company exists and that it is liable to tax.