If you are starting a business, you will probably want to know which business model is right for you. The way in which you set up your business can have many implications including tax, how you are paid, ownership, how business decisions are made, and the level of administration you may need to do. As a result, it is important to choose the right business model from the outset. In this insight, we provide an overview of three of the main business models that you could choose from, as well as the benefits and drawbacks.
Being a sole trader
If you choose to operate as a sole trader, you and your business are treated as being the same entity, from both a legal and tax perspective. This means that you are responsible for any debts incurred by the business, and you will pay tax and National Insurance contributions on the profits of the business as your personal income.
However, many benefits come with this style of operation. You will not need to register the business with HMRC; you simply need to let them know you are operating and self-employed for tax purposes. There are fewer administrative matters to deal with, and it is much easier to transfer money out of the business. You will also not be required to file annual accounts, or submit a confirmation statement. When the time comes, it is also much easier to cease trading and close the business than it is with a limited company, which can be complicated especially when the company has debts.
Entering into a partnership
If you are going into business with someone else, you may consider entering into a partnership. A partnership has many of the same features and benefits as being a sole trader, but you share the responsibility with the other partners. Partnerships are straightforward to set up and are more flexible than limited companies in terms of structure.
Each partner own a percentage of the business, which is typically set out in the Partnership Agreement, and pay tax on their share of the profits. Having multiple business owners means that the financial responsibility and management of the business can be shared. The opposing side to this is that often in partnerships, disputes can arise between partners, and how decisions are made may not be set out as clearly as it is for limited companies.
Setting up a private limited company
The most important difference, and benefit, of setting up a private limited company is the concept of limited liability. When a company is formed, it is deemed to be a separate entity from the shareholders who own the company and its directors. This means, there is a reduced risk to shareholders if things do not go according to plan, as they are not personally responsible for the debts of the company in most cases.
To set up a company, you must incorporate the company and register with Companies House. There are several documents which must be created in order to incorporate, including Articles of Association which govern how the company is run. The company is owned by those holding shares which can be allocated to any number of people following incorporation, but you can also hold all shares yourself. Companies require far more administration than other models, and failure to comply with these legal requirements can be costly.
If you would like help in setting up one of these businesses, or if you do not think any of these models suit your needs, then our Company and Commercial team will be happy to help. Please visit their dedicated hub page for starting a business, or content them directly.