One of the first decisions you’ll face when setting up your business is selecting the appropriate business type or structure. Your choice will impact your legal obligations, taxation, personal liability, and how you operate your business. There are pro’s and con’s whichever status you decide on. Below is a brief overview to help you make the right decision.
This is the simplest and most common structure, where you run the business as an individual but you are personally responsible for all aspects of the business. You can register as a sole trader via HMRC.
There are no set up fees and there is no requirement by law to have annual accounts. For tax purposes, the profit (or loss) you make as a sole trader is combined with any other income you may have (for example if you continue in employment), which may mean you exceed your current tax threshold. Even if you do not draw down any income from your business you may be taxed on your profit as it forms part of your total income, after personal allowances have been taken into consideration.
In respect of liability, sole traders do not have limited liability, which means any debts the business incurs will be counted as personal debts so your personal assets could be at risk.
You will pay Class 2 National Insurance at the prevailing rate irrelevant of profit, and Class 4 depending on the level of profit generated.
Pros: Easy to set up, complete control, and simple tax reporting.
Cons: Unlimited personal liability, potential difficulty raising capital.
A partnership consists of two or more individuals running the business. Even if you have an existing relationship, it is advised to seek advice and form a deed of partnership prior to commencing trading. The partnership agreement should cover how the business will be run, responsibilities, how the profits will be apportioned and what happens in the case of dispute.
You will need to set the partnership up with HMRC and all partners must register as self employed with HMRC. Exactly the same as a sole trader, partnerships do not have limited liability and any liabilities are shared between the partners.
Pros: Shared responsibility, diverse skills, and resources.
Cons: Unlimited liability, potential conflicts, and shared profits.
Limited Liability Partnership
You can register a Limited Liability Partnership (LLP) with two or more members with Companies House.
Each member pays tax on their share of the profits as in an ordinary business partnership, however, there is no personal liability for any debts the business cannot pay (however personal guarantees for finance may be in place).
Ensure you have a LLP agreement in place, this will set out how the business will be run including profit shares, members responsibility and how members will join or leave the LLP. We suggest legal advice is sought for this process. Designated members may be prosecuted if they do not meet their legal obligations.
Pros: Limited liability for partners, flexibility in management.
Cons: More complex than a sole trader or partnership, certain reporting requirements.
A Limited Company is responsible in its own right for everything it does and its finances are separate to your personal finances.
Any profit made is owned by the company, after it pays Corporation Tax. The company can then share its profits amongst shareholders. Directors are
responsible for running the company.
As a director there are responsibilities that you must undertake, including:
- Following company’s rules shown in its articles of association
- Make decisions for the benefit of the company, not yourself
- Declare conflict of interest if you may personally benefit from transactions the company makes
- Report changes to Companies House and HMRC
- Ensure the company’s accounts are a true a fair view of the finances of the business
- File accounts with Companies House and the Company Tax Return with HMRC
- Ensure Corporation Tax is paid
Pros: Limited liability, tax advantages, easier to raise capital, and professional image.
Cons: More administrative requirements, financial transparency.
These are simplified forms of limited company for smaller businesses, with reduced reporting requirements. You can find out more about them on the Companies House website.
Other types of company
Community Interest Company (CIC)
This is a special type of limited company designed for social enterprises, with profits reinvested for community benefit. This means that it can be easier to access certain types of funding and grants, but limits what you can do with the profits and comes with a different set of regulations. Companies House has a breakdown of the differences between a CIC, CIO (Charitable Incorporated Organisation) and Co-Operative.
Public Limited Company (PLC)
Public Limited Companies are publicly traded on the stock exchange. This type is usually suitable for much larger enterprises and well-established businesses, as it has the most complex legal and financial requirements.
Ultimately, your choice of business structure should align with your business goals and long-term vision. Consider seeking legal and financial advice to make an informed decision – including contacting a Growth Hub advisor. You can also change your business structure as your company grows and evolves, ensuring it always suits your needs and ambitions
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