Looking to start a business? Find out what the right legal business structure is


Author: Henry Ejdelbaum

Tags: Legal structures, SMEs

Starting a new business poses different challenges, and you need to do lots of research first. There are different structures for how to set up your venture, each with advantages and disadvantages depending on the size and nature of your business and your long-term plans.

Below we give you a summary of the key legal structures you might be thinking about.

  1. Sole trader: the simplest structure (also known as ‘self-employed’), and the most popular for start-ups. You pay income tax on profits instead of corporation tax. Profits over £50,271 are taxed at 40% and over £150,000 at 45%.
  2. Partnership: issimilar to a sole trader but needs at least two people to form it, although there is no limit on the number of partners. Each partner registers as self-employed but submits separate tax returns. It offers simplicity and flexibility. Everyone is jointly responsible for debts and shares damages.
  3. Limited company: is created when you incorporate your business as a limited company and create a separate legal entity. Corporation tax is at 19% on profits and reduces personal financial risk. If something goes wrong, you are only responsible for your share in the business. It involves more administration but can be good for a business in the long run for greater stability and ease of trading.
  4. Limited liability partnership: popular among accountants and legal firms and are similar to ordinary partnerships. LLP’s must have two ‘designated members’ minimum and if it fails, each member is liable for the value of his shares.

Why is it important to businesses?

Choosing the right legal structure for your business is one of the most important decisions any new business owner will make which can affect areas such as legal liability, control over the business and taxes. It can save or lose your business valuable cash.

A good accountant will be able to advise you on the most suitable structure for your business regardless of its maturity. Of course, that advice should be tailored to your circumstances and what you want to achieve, and the best option for your business might change over time.

For everything else related to tax and business advice, please contact your local AIMS accountant.