Business Structure

Also read: Choosing a Name | Start Up Costs | Start Up Finance

There are several structures for you to choose from. If you are not sure as to which structure best suits your business then you should seek the advice of an accountant or solicitor. You need to choose the right structure for your business as it affects many elements of your business such as : - tax and national insurance, your business records and accounts, management decisions, financial liability should your business run into trouble.

Self-Employment

To be known as Self Employed you should register as such with the Inland Revenue. If you are self employed you can still do work as an employee. The work that you do for your own business must be done purely on a self employed basis.

You yourself invoice clients for any work that you do for them. You use your own tools or equipment to do the job or complete the service. You state the hours you work and decide whether you should hire other people to do the work you have agreed to do. You can invest your own money into your business or the partnership and can do work for as many customers as you wish.

Sole Trader

As a Sole Trader you are running a one person business, any profits are yours, any records and accounts should be pretty simple. Should your business incur any debts you are personally liable for these debts being paid, this means that any assets such as your home are at risk. You make all management decisions.

You will have to keep all records and accounts, income expenses and profits yourself and once a year make a self-assessment return to the Inland Revenue. As a Sole Trader you need to register with the Inland Revenue as being self employed. You will also have to pay Tax and National Insurance.

Partnership

Partnerships usually consist of two or more partners, each partner is classed as self employed and each take a share of the profits. All partners also share the risks and are held personally responsible for any debts that the business incurs. This means that each individual partner’s home and assets are at risk. Each partner has their say in the day to day running of the business and any managerial decisions. Written agreements between partners using a solicitor or accountant can serve to stop any arguments that may arise between partners.

Partnerships can raise loans themselves or use their own assets and some even have Sleeping Partners who are not involved in running the business but who contribute money to it. Should a partner resign, goes bankrupt or even dies then the partnership has to be dissolved.
Partnerships have to keep records and accounts of all business elements, profits, expenses, income and yearly each individual member must make self assessment returns to the Inland Revenue. The partners are taxed on their own personal share of the profits.

Limited Liability Partnership (LLP)

With a Limited Liability Partnership, unlike an ordinary partnership, liability of the individuals or ltd companies that have a share in the business is limited to the amount of money that they have invested in the business and any personal guarantees they have given in respect of finance raising. This means that some members will be liable for less than others.

There has to be at least two members, there can be an unlimited number of members but two designated members will named as having more responsibility. Written agreements keep conflict between partners to the minimal. Partners are responsible for raising finance through loans or using their own assets and are held responsible for any management decisions.

Again members should keep all records and accounts and each individual member must make annual self-assessment returns to the Inland Revenue.
LLP’s must register at Companies House. There should be a members agreement stating what share of the profit each member should receive. Each member of the partnership will be taxed on their share of the profits and pay tax and national insurance contributions. Should any member be a limited company member they will have to pay corporation tax.

Limited Liability Company

Limited companies have to be registered at Companies House.
Shareholders own personal finances or assets are deemed completely separate from the company’s finances. This means that shareholders cannot be held responsible for the limited company’s debts. Having said this any investment made into the company can be lost should it experience difficulties. Directors are sometimes asked to guarantee loans offered to the company.

There are two sorts of limited companies: - Private Limited Companies can consist of one or more members and have a company secretary. Public Limited Companies must have at least two members a company secretary and must have issued shares to the public valuing at least £50,000 before it can trade as a public limited company.

Limited Companies have to register at Companies House. Shareholders finance the business whether it be from borrowing or profits retained and have to keep all records and accounts which are then filed at Companies House. Any appointed directors make the managerial decisions and any change made to structure or management should be relayed to Companies House. Profits are usually distributed to shareholders in the form of dividends.

Limited Companies pay corporation tax on profit and must make an annual return to the Inland Revenue. Company directors must pay National Insurance contributions as well as income tax on their salaries.

Franchises - More Information on Franchising

Successful and well established businesses will sometimes offer franchises. This means that you can buy a license enabling you to sell the products and offer the services of the franchiser company. You are then known as the franchisee and can use the name of the franchiser. Both the Franchisee and the franchiser can benefit.

The Franchiser will normally draw up an agreement stating the terms by which the Franchisee can manage the business. You will have to pay for the franchise, this is usually done by agreeing a share in your profits and an initial fee. It is usual for the Franchisee to find the money to start up the business but some franchisers will lend you some money towards this.

Most Franchisees are Ltd Companies, Sole Traders or Partnerships. Franchisers will want to see detailed financial records of how the business is going. Tax and National Insurance will have to paid by the Franchisee and all depends on their business structure.