When setting up a business in the UK, you will have to choose between 3 main types of businesses. These types of businesses determine things like the responsibility you will have within the businesses, how the profits will be shared, what kind of taxes you have to pay, the paperwork involved in registering the business and so on.
1- Limited Company
2- Sole Trader
These 3 are geared towards making profits while those that have not been listed revolve around providing services not particularly for profit. So let us focus on these 3 that are focused on profits.
A limited company is set up to run the business in its own right with its finances separate from yours as an individual. The profits it makes belong to the company and are shared among the shareholders after payment of corporation tax. Limited Companies are further divided into 3 types:
- Private company limited by guarantee (it doesn’t have share capital but has the guarantee of the members in case of liquidation)
- Private company limited by shares (Share capital is provided by shareholders and not offered to the public)
- Public limited shares (It can be traded on the stock exchange markets)
Before you set up a limited company, you may want to consider the benefits and drawbacks of this.
- Investors will find it more attractive to invest in a limited company
- Banks trust limited companies much more that the other 2 kinds of companies so it is easier to get bigger loans
- It is much easier to transfer shares between members
- You do not have to pay as much taxes on dividends as you would in partnerships or sole companies
- National insurance is not imposed on dividends from limited companies
- There is very little privacy of your accounts and other business details since these are part of public records which even your business rivals will have access to.
- Although the finances of a limited company are separate from personal finances, in case the business fails to pay a loan, the bank can still hold the directors accountable and they will have to pay from personal finances.
- Directors can be subject to late filing penalties or accusations of criminal activity if they fail to deliver statutory documents to Companies House.
- It is not as easy as it may seem to separate personal finance from that of the business.
- You will need to spend much more on accountancy fees as the load is greater.
Despite the drawbacks, it is still very profitable to set up a Limited company. In the UK, you can do this at Companies House which oversees the registration of Companies.
This is a purely private business, as a sole trader you are responsible for running of the business, you hire people to help running the business but after payment of salaries and taxes, the profit is entirely yours. This also means you are the business so all responsibilities including legal ones fall on your shoulder.
So what are the advantages of this?
- Since you are the owner, decision making is very easy you can change the structures of the business as you please with no interference from partners.
- It is also very easy to set up and register at Companies house with no payments needed.
- The cost of accountancy is much lower than a limited or partnership company
- There is less paperwork to be submitted every year to the Companies House.
- You are your own boss and you answer to no one but yourself in the case of losses.
- You are likely to have less profits considering everything you make is going to be taxed
- Banks are usually very critical when dealing with sole traders.
- Your personal finance and property are at risk if the business fails to honour its debts
- It is not easy competing with Limited companies.
This is just as it sounds, the business is partly owned by 2 or more individuals and at times even a Limited Company can count as a partner in a business, so it is not always actual individuals that would make up a partnership. In partnerships, each partner bears a percentage of the finance burden and profits are shared according to partners input and taxes paid individually on profits.
- There is shared responsibility for the business start-up capital
- Shared losses
- You are able to combine efforts and compliment each other’s business skills
- The risk is split between partners
- Banks may look more favourably on a partnership than a sole trader business
- There is the possibility of making more profits due to combined efforts
- You can be held liable for your partner’s failure to honour their debt
- You have to share the profits with the partners
- Decision making may be slowed down by consultation with partners
- If you are partners with a friend, it may put the friendship to a big test.
In the end, the type of business you choose to set up will depend on your goal and which kind of business will help you meet that goal effectively. In the UK, you can receive further guidance on setting up a business from Companies House.