Common Business Structures

Sole trader

  • Being a sole trader is the simplest way to run a business.
  • You make all the decisions on how to manage your business.
  • You raise money for the business out of your own assets, and/or with loans from banks or other lenders
  • All profits go to you, and you are taxed on these in your annual self-assessment tax return.
  • As well as tax, you need to pay National Insurance Contributions – fixed-rate Class 2, and Class 4 on your profits. 
  • As a sole trader, you are personally responsible for any debts run up by your business.

 

 

Partnership

  • A partnership is a relatively simple and flexible way for two or more people to own and run a business together.
  • In a partnership, two or more people share the risks, costs, and responsibilities of being in business.
  • Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.
  • Each partner is self-employed and takes a share of the profits, and is taxed on this profit share as shown above for a sole trader.
  • Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns dies or goes bankrupt, the partnership must be dissolved although the business may not need to cease.

 

 

Limited liability company

  • Limited companies exist in their own right. This means the company’s finances are distinct from the personal finances of their owners.
  • Private limited companies can have one or more shareholders.  They are not responsible for the company’s debts (unless they have personally guaranteed a bank loan, for example). However, they may lose the money they have invested in the company if it fails.
  • They must have at least one director and a company secretary, who may also be shareholders.
  • Companies must be registered (incorporated) at Companies House.
  • Annual accounts and an annual return have to be filed with Companies House – this information is available to the public.
  • The directors and secretary are responsible for notifying Companies House of changes in the structure and management of the business.
  • Profits are usually distributed to shareholders in the form of dividends.
  • Companies pay corporation tax and must make an annual return to HM Revenue & Customs
  • Company directors are employees of the company and must pay Class 1 National Insurance contributions as well as income tax on their salaries.
  • Directors who trade negligently may be personally liable for the debts of the company.