ABC of Accounting – Deciding on a Business Structure – Part 1

In this weeks ABC of Accounting blog we look at the various types of legal business structure available in the UK and explain the most commonly selected types along with the reasons and benefits why a company makes the choise it does.

Deciding on a Business Structure

The first step to starting a new business is to have a great idea. Followed swiftly by market reasearch, as you need to know there is a market for your product or service and if someone else is providing this can you do this in a better and more profitable way. If so, the next and very important step is your business plan, it needs to be viable, all aspects costed out, a defined structure outlining where you’re going and how you are going to get there.

Now you need to decide on the legal type of business structure your company is going to take.

Sole Trader

Sole trader is a term often used to refer to a business with one employee only, the owner when in fact, it relates to the legal structure of the company. So, although the legal entity of the company can be Sole Trader you can have employees.

As far as HMRC are concerned a sole trader is considered to be self-employed and as a Sole Trader you must register with HMRC for self-assessment as soon as you start trading. If your annual turnover is greater than £85k you will also need to register for VAT.

As a sole trader your profit after tax is at your disposal however, you are responsible for any debts incurred by your business so, your own assets are at risk should your business fail. This type of legal business structure enables you to retain full control and is easy to setup but bear in mind you are fully liable for all debts.

Private Limited Company

If you decide to register as a Private Limited Company a lot more is involved than registering as a Sole Trader. A Private limited Company can be setup by one person or individuals who can invest in the company as shareholders but must have at least one director.

The director/directors have a legal requirement to file the company’s accounts with Companies House along with any movement in directiorship, and any changes within the company such as shareholding and registered office address.

As with a Sole Trader, if the turnover exceeds the VAT threshold of £85k then VAT returns need to be submitted online via the MTD facilities within any online accounting software inline with HMRC guidlines.

The acounting requirements of a Limited Company are more detailed in so much as along with your company’s accounts being filed each year an annual Corporation Tax return is also required to be completed and submited. The advantage of a Private Limited Company compared to a Sole Trader is that should the company fail the shareholders would not risk losing thier personal assets as is the case with the Sole Trader.

You can use a company formation agent to register your business and deal with all the necesary paperwork involved in this, these are becoming increasly popular. Obviously there is a cost for this service but the service that’s provided is quick and efficent and can also offer your company other services which you may find beneficial.