Tips to Choose the Right Structure for Business
Business structures tend to vary quite widely. While setting up a business, choosing the right structure is of prime importance to the life and success of a company. Regardless of whether you have bought an existing business or are about to start a new one, you need to decide which form of entity or organisation is right for you. There are different types, each of them having a set of advantages and disadvantages. The type of structure you choose for your business will not just impact on the amount paid in taxes but also the paperwork that your business needs to file and the personal liability faced.
This is a decision that should not be taken lightly without the sound counsel of business experts and company formation agents. Its better to seek professional advice while considering the pros and cons of different types of business entities.
Business Entity Types
The type of business entity chosen will chiefly depend on three significant factors. They are taxation, liability and flexibility required.
Here is an idea of the common business entity types.
This is a business operated by an individual. Sole proprietorship is considered to be part of an individual rather than a separate entity. The profits and losses are included on an individuals personal tax return. Here, the individual retains personal liability for all legal matters and business debts.
This is a business structure wherein several individuals share the benefits and risks of a business.
You can share all the profits between the partners. Each partner pays tax on their share of profits. The partners remain responsible for:
Losses incurred by a business
Bill for the things a partner buys for business, like equipment or stock.
This is an association that is set up on the basis of an agreement between a few people who collaborate with each other for a cause. The reason here is not making profits. It can thus be a sports club or a voluntary group. There is no need to register the unincorporated associations. It doesnt cost anything either.
The individual members are held responsible for the debts and contractual obligations.
Private Company Limited by Shares
This is the most common trading model for UK based businesses. It can consist of a sole director and shareholder or multiple directors and separate shareholders/investors. A Limited company is a separate legal entity to that of its owners and all legal and financial obligations are met by the company with the directors and shareholders incurring limited liability.
Private Company Limited by Guarantee
A Limited by Guarantee Company is the typical model adopted by non-profit organisations such as sports clubs and charities. This type of company has no share capital, and consequently no shareholders. Instead the members of the company guarantee a nominal sum of £1 to the company and this is the extent of their liability.
A key provision for Limited by Guarantee companies is that the profits generated must always be reinvested into the objects, as defined in the companys Articles of Association. This prevents members of the company from extracting profits for their own personal gain.
Limited Liability Partnership (LLP)
Limited liability partnership (LLP) can be set up for running a business with two or more than two members. Here, the members can be both a person as well as a company. Each member has to pay tax on their share of profit as it is the case in ordinary business partnerships. However, they are not personally liable for the debts businesses fail to pay.
Tips to Decide on the Right Business Entity
While taking a decision on the type of business to form, you need to evaluate different criteria. You can focus on the below-discussed areas while choosing a business format for your organisation.
Find out the extent to which your business needs to be insulated of legal liabilities. Are you ready to take on the personal liability for the potential losses associated with business? If you cannot, its better not to opt for partnership or a sole proprietorship.
On the basis of goals and the situation of the business owner, the options to minimise taxation are to be decided upon. You need to choose a structure reflecting your tax, financial and administrative requirements. For example, if you are looking forward to raising capital and taking a business to the next level, sole trader structure may not be the best fit for you.
Your goal is maximising flexibility of ownership structure considering unique needs of the business as well as personal requirement of the owner or owners. Individual requirement is a prime consideration here. No two situations are same; particularly if multiple owners are involved.
You can also consider future needs to decide on the type of business entity.
Deciding on the type of business entity and setting up one is no easy job. Quite unfortunately, businesses are quite varied and there are no hard and fast rules regarding which structure would work and which would not. Make sure to consult an experienced and well versed professional while forming a company. Also, go on assessing your business as it grows, since reviewing the structure can save you money.