The Legal Structure Of Your Business
The Legal Structure Of Your Business
The Different Types Of Structure
There are four main types of legal structure that can be used when setting up in business. These are:
- sole trader;
- partnership;
- limited liability partnership;
- limited liability company.
Choosing which legal structure to use needs careful consideration and you are recommended to seek professional advice from an accountant or solicitor about this. They will inform you which business structure would best suit your circumstances and can make all necessary arrangements for setting up the business correctly.
How The Business Structure Will Affect You
The business structure will affect:
- How much tax and National Insurance you pay.
- What accounts you have to keep and submit.
- What other records you have to maintain.
- Your financial liability for the business
- Who you have to register the business with.
- How you can raise money.
- How major decisions are made in the business.
- Which regulations will apply to the business.
It is therefore important to obtain the right advice before deciding on what type of legal structure to adopt for your business. The next section gives a brief overview of the four main types of structure together with the pros and cons of each.
Sole Trader
The simplest way of starting a business is to become a sole trader and many licensees use this type of business structure. Being a sole trader doesn’t mean you have to run the business single-handedly – you
can employ staff! In the case of a couple running a pub, one person can be registered as the sole trader (and self-employed) and the other will be considered as staff (employed).
Pros
- Quick and easy to set up.
- Registration fees are not applicable.
- Only simple, unaudited accounts are required.
- You make all the decisions about the business yourself.
- Any profits go to you.
Cons
- You are personally responsible for any business debts.
- You need to raise any money for the business yourself.
- You are entitled to fewer social security benefits than if you were employed.
Tax And National Insurance
As a sole trader, your profits are taxed as income. You will pay fixed rate Class 2 National Insurance contributions and Class 4 contributions on your profits. You have to make an annual self-assessment return to HM Revenue and Customs.
Partnership
A partnership is where two or more people run a business and share the decision-making responsibilities, business risks and costs. Each partner is regarded as self-employed. A partnership is another popular way of operating a public house business, especially for husband and wife arrangements.
Pros
- Can be set up with few formalities.
- Each partner shares any profits.
- Decisions are shared.
- Expertise can be shared and risks spread.
- Money can be raised by introducing new partners – ‘sleeping’ partners may contribute money without being involved in running the business.
Cons
- Each partner is personally liable for the business debts even if incurred by another partner.
- Partnerships can be dissolved through disputes or the resignation, death or bankruptcy of a partner.
- Problems can occur where partners are incompatible.
Partnership Agreements
Partnerships should have a written agreement drawn up that gives details of how the partnership will work. This is just as important in the case of married couples and family partnerships, as it is with any other form of partnership. The partnership agreement will include:
- how much money is to be invested by each partner;
- how profits will be shared;
- how much time each partner is to contribute;
- what spending limits apply;
- what process needs to be followed if partners want, or need to reduce their involvement in the business.
A solicitor will prepare the agreement for partners to sign.