Simple Business Guide #2 - Which company structure should I choose?
So you have decided to set up your own business. You've prepared a business plan. You've decided what you are going to sell, to whom, how, where and when. Hopefully reading our 10 questions to answer when starting your own business guide has helped clarify your thinking. So now you are ready to go. But which business structure is best for you? Here are the main options, with some pros and cons of each type:
1. Sole Trader
This is probably the simplest business structure. This is where you as an individual start trading in your own right without setting up a separate legal company to do this. So what are the pros and cons:
Pros
- Simple structure which is relatively easy to set up
- Probably the cheapest option with regards to setting up and on-going running costs
- Not very much administration involved
Cons
- Higher risk for you personally as the business and you are one and the same. This means that any debts or liabilities the business incurs are effectively yours so you could lose everything
- It can be difficult to obtain finance and loans for a Sole Trader business as the finance would be in your own name
- Not the most tax efficient solution
2. Partnership
A Partnership is similar to a Sole Trader except that it is where two or more people carry on the business together, usually sharing the risks and rewards. As such the pros and cons are similar to a Sole Trader but with some main differences:
Pros
- Relatively simple structure although you will need to take legal advice to set up an official partnership agreement
- Relatively cheap option with regards to setting up and on-going running costs
- Not very much administration involved although as there will be two or more owners of the business this will take more time to administer than being a Sole Trader
Cons
- Slightly lower risk for you personally than as a Sole Trader as any debts and liabilities are shared equally between the partners. However you would still be liable for any debts or liabilities if something went wrong
- Can be more tax efficient than being a Sole Trader, but as you only own half of the business (or less if there are more than two partners) you will have to share any profits the business makes
3. Limited Liability Company
A Limited Liability Company is basically a separate legal person from you, the owner of the business. This means that this structure gives you much more protection than either of the structures already mentioned.
Pros
- The Company is a separate legal entity which gives the owner protection from any debts or liabilities the business incurs
- Can be very tax efficient for the owner if structured properly
- Can give a more professional impression for the business and make your business appear bigger than it is
- Could give you access to bigger customers and suppliers, as some companies would not deal with a Sole Trader
Cons
- Generally more expensive to set up than the other structures, although these costs are coming down with internet company formation agents making the process of setting up a company much cheaper and simpler than it used to be
- More administration is involved. For example annual returns have to be sent to the government keeping them up-to-date
- Some of the running costs are more expensive. For example most accountants charge more for a Limited Company than they would for a Sole Trader. However this is usually more than offset by tax savings made
4. Limited Liability Partnership
This is basically a cross between a Partnership and a Limited Liability Company. The business still has two or more partners but their personal liability is now limited which gives them more personal protection.
Pros
- The Partnership is a separate legal entity which gives the owner some protection from any debts or liabilities the business incurs
- Does not have the administrative burden that a Limited Liability Company has
Cons
- The tax situation is exactly the same as for a "normal" Partnership
- The set-up and running costs would generally be higher than for a "normal" Partnership.
Conclusion
There are of course many other considerations when deciding on which structure is best for you, and there is no right or wrong answer. Hopefully this guide gives you some ideas of the key differences between the different types of business structures.
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