What is the best way to structure my business?
Posted on 10th August 2023
It was 'National Give Something Away Day' last month... so we've decided to offer a piece of our knowledge for free!
We are often asked: “If I am a start-up business, what is the best way to structure my business?”
There's no simple answer to this, as it mainly depends on your business’s long-term plan and goals.
Below is an analysis of the 3 most common business structures. See what you think would fit your new business best...!
Sole Trader
A sole trader is a person who owns and operates their own business. Sole proprietors run their companies by themselves, have complete control and make all the decisions for the business.
The advantages of being a sole trader include:
you’re the boss
you keep all the profits
start-up costs are low
you have maximum privacy
establishing and operating your business is simple
it’s easy to change your legal structure later, and if circumstances change you can easily wind up your business.
Disadvantages of being a sole trader include:
you have unlimited liability for debts as there’s no legal distinction between your private and your business assets
your capacity to raise capital may be limited
all the responsibility for making day-to-day business decisions is yours
retaining high-calibre employees can be difficult
it can be hard to take holidays
you’re taxed as a single person
the life of the business is limited.
Partnership
As their name suggests, partnerships are a business that two or more individuals own and operate together. Unlike other business structures, there are multiple types of partnerships you can establish. Before going into a partnership, you must consider the pros and cons. Even though it may seem to make sense, it’s not your only option – which we will explain later in this blog.
Advantages:
Extra set(s) of hands to help with running the business
You can benefit from your partners’ additional knowledge and experience
Less financial burden on you personally
Disadvantages:
You can’t make your own decisions, you must work with your partners to make decisions
Possible disagreements about the way the business is run
Having to split the profits
You aren’t separate from the business
Each partner is taxed individually
Limited Company
A limited company is a privately managed business, owned by its shareholders and run by directors, where the liabilities of the company are limited in law to the assets of the business. Individuals can be a shareholder, or a director, or both, so it’s up to you what role(s) that you and any fellow shareholders and directors feel would be appropriate for you to have within the business. Irrespective of your personal role(s), the company is its own legal entity – meaning that the finances are separate to the personal finances of its owner(s).
Advantages:
Finances of the business are separate from yours
Reduced personal exposure to financial risk
You can claim back expenses on the business
Easier to retain and reinvest profits
Disadvantages:
Much more administration than a sole trader
Very likely an Accountant!
Must submit an annual company tax return and full statutory accounts to HMRC and Companies House
Can be responsible for several (if not many) employees’ Income tax and NI
If you'd like to discuss the right business structure for you and your new business, please get in touch. We're here to help – and not just on National Give Something Away Day!
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