When starting a business in the United Kingdom, you can choose between different forms of business ownerships:
- Sole trader (1 person)
- Partnership (2 or more people involved)
- Limited company (can be starting by 1 or more people)
Most businesses start with just one person involved, in that case, your choice is narrowed down to either running your business as a sole trader or forming a limited company. If there are two or more participants, the business could be a partnership, a limited company or a limited liability partnership.
Sole trader or sole proprietor is the legal term used to identify someone in business on his or her account. A sole trader owns their business fully and is personally liable for all their business debts.
The business does not need to be registered except with the HM Revenue & Customs for the purpose of paying income tax on the profits made by the business and perhaps VAT should the business’s turnover exceed the registration threshold.
A sole trader pays income tax, Class 2 NIC on their business profits.
Private companies limited by shares: The majority of small companies in the UK are private companies limited by shares. It is simple to form a bog standard private limited company by shares (ending with the word limited or ltd) and there is no minimum capital requirement, they are commonly registered for £100 or less.
Limited companies pay corporation tax on profits and must register for VAT (If threshold is reached) or PAYE scheme if they employ other people. Shareholders of a limited company get paid by way of dividend, benefits. Usually directors are 100% shareholders.
Private limited companies that are classified as small can file abbreviated accounts rather than full accounts.
For 2 or more people in business, the choice is essentially between a partnership, a limited liability partnership (LLP) or a limited company.
Partnerships is when 2 or more people carry on single business together with a view to making a profit. Partnerships are similar to sole trader for taxation purposes. There is no requirement to register a partnership except for payment of income, VAT and PAYE if employing other people.
Partners are taxed on their share of the profit. Having a partnership agreement between the partners is not a legal requirement but advised in practice. A formal written agreement for the partnership is advised to protect all partners long-term interests in what may become a very valuable business.
Limited liability partnership (LLP)
LLP’s are a hybrid between a partnership and a limited company. They confer full limited liability of members, are registered at Companies House, but retain many features of common partnerships.
Partners in an LLP are taxed individually on their share of the profit from the business as in a common law partnership.
Do contact us if you are starting up and would like further advice on this subject.