Business structures – Which is right for my company? 🤷🏻‍♀️

Anna Koutras

 · 09/19/2018  · 09/19/2018


Mastering the ‘ins and outs’ of setting up your own business can seem like an overwhelming task. Fear not though, we’re armed with some top-tips that should see you through the early days and beyond! Once you’ve decided you want to start your own business, one of the most important decisions you’ll need to make is figuring out the best structure for your company. Although you can always change the structure in the future, knowing what you’re getting yourself into from the get-go is key, as it can affect your liability and the tax that you’ll be required to pay.

The type of company you choose to set up will also dictate the amount of paperwork you’ll need to complete, so make sure you’re fully aware of all your responsibilities before you begin. No one likes nasty surprises!

Which business structure is right for you? 🤔

To establish what kind of business structure is right for you, consider who’ll be making the decisions, what kind of liability you want, the record keeping you’ll need to do and the taxes you’ll need to pay. Are you a ‘one (wo)man band’ or will you be hiring any employees?

You’ll also want to think about how or if you’re going to scale the company and whether you’ll be likely to seek funding at some point in the future. Thinking about the answers to questions like these, should help you to decide the best way of setting up your business.

In the UK the four most common types of business structures that people set up are:

  • Sole Trader
  • Limited Company (Ltd)
  • Partnership
  • Limited Liability Partnership

So what’s the difference? 🤷🏻‍♀️

Each business structure will have it’s pros and cons dependent on the needs of your company, but here’s a brief overview of each structure so you can think about how you want to set-up your company.

Let’s break it down…

Sole Trader 👷🏻‍♀️

There’s a bit of confusion surrounding being a ‘sole trader’ and how this differs from being ‘self-employed.’ In essence there’s actually no difference at all. If you work for yourself and you run your own business, or if you earned more than £1000 from self employment between 6 April 2017 and 5 April 2018 you should register as a sole trader.

You’ll be able to keep all your business’s profits after tax, but you’ll be held personally liable should you incur any losses - which means your personally owned assets such as your house or car could be used to settle your business debts. If you’re worried about this happening, speak with a lawyer or an experienced Director, who should be able to give you more advice, or look into insurance to help protect you from certain risks. It’s worth noting that a sole trader needs to register for Self Assessment and file a tax return each year.

Although it’s not a legal requirement, if you want to make your accountant happy it’s worth keeping your finances separate from your everyday spending. The Revolut Freelancer account is a great choice, especially if you receive money in different currencies.

✅ Simple to set up
✅ Cheap
✅ No need to file annual company accounts
✅ Minimal paperwork involved

🚫 Personal assets at risk if something goes wrong
🚫 You need to complete a tax return each year
🚫 Pay more in tax

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Limited Company 🏗

One of the key differences between a sole trader and a limited company is the fact that a limited company is legally separate from the people who own & run it.

Whilst you can keep any profits that the company makes after tax, you’ll be required to have separate finances to your personal ones. This is where a Revolut Business account would come in handy, as you can set up under your registered business name and allow as many people as you need to have access to the account. You can also issue different team members their own company card and set individual budgets, which is useful if you want to stay on top of your company finances!

Besides keeping your business funds separate from your personal finances - you’ll need to register with Companies House and this process is known as ‘incorporation.’

Whilst this isn’t a complicated process there’s a sizeable amount of paperwork you’ll need to work out before you can register, including getting some key players onboard who’ll help to run the company and make decisions. You’ll also have to assign shares and decide who gets voting rights, as well as having the shareholders sign the memorandum and articles of association (the written rules of your company).

✅ Your company will be its own legal entity
✅ Only your business assets are at risk, should something go wrong
✅ Dividends can be paid to shareholders
✅ Ability to raise more capital through the sale of shares
✅ Can be operated as a non-profit business

🚫 Your company information is public
🚫 You’ll have to complete annual returns and accounts
🚫 A lot of paperwork involved to be compliant

Partnership 🤝

If you want to start a business with another person you might consider trading as a partnership. With a Partnership, there would be two or more people running the business, each with a stake in the ownership and the structure would be similar to that of a sole trader. Whilst there’s not a crazy amount of paperwork to get a Partnership up and running, the downside is that both you and your partner would each be held liable for any business debts that the company might incur.

✅ Simple to set up
✅ Cheap
✅ Minimal paperwork involved
✅ No need to file annual company accounts

🚫 Full unlimited liability for debts of the business
🚫 Each partner is jointly liable for the Partnership’s debts
🚫 Pay more in tax

Limited Liability Partnership 💼

If structuring your company as a Partnership sounds like biting off more risk than you can chew, a Limited Liability Partnership (LLP) could be a good way to go. Much in the same way as a Limited Company is formed, an LLP has to be registered with Companies House and comes with its fair share of paperwork that you’ll have to complete and maintain. On the upside, only your company will be held legally liable should something go wrong with your business, which offers more protection for your personal assets.

This type of company structure came about in 2001 by the LLP Act 2000 which was set up to meet the needs of traditional professions such as accountants, solicitors and doctors, in order for them to be able to create a company whilst limiting their liability. It’s a good choice for companies that don’t intend to have many employees or won’t need to raise equity through the sale of shares. The idea is that each owner would have a similar role and responsibility within the business structure.

✅ Owners are only legally responsible for the business debts in relation to the amount of capital they invested
✅ Favourable tax regime
✅ Greater flexibility

🚫 Annual accounts and financial reports have to be made public
🚫 Must be set-up with intention of making a profit ( nonprofits can’t use this company structure )
🚫 Profit taxed as income

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Whilst there are many options for your business, as always the golden rule here is research! Find out as much information as you can before you get going and if you’re unsure about anything, always seek advice. There are plenty of free resources available for budding entrepreneurs so take advantage of any information you can get your hands on. Armed with knowledge, a winning idea and a Revolut Business account, you’re already one step ahead.