There are a number of options, all of which have their merits and differ in legal and taxation terms – but four key options are as follows:
- Sole trader
- Limited liability partnership (LLP)
- Limited company (LTD)
On your own as a sole trader
By opting for the sole trader route, you and your business are effectively one and the same – from both a tax and legal perspective. This means that you are personally responsible for the business – and any debts it incurs. The profits you make, which are sales minus costs, until April 5th of each year are declared on your annual self-assessment tax return (online deadline January 31st) and classed as your personal income that year. You must pay income tax and national insurance on this at the standard income tax rates and you do not need to register the business as such, but you should tell HMRC that you are in operation and self-employed for tax purposes.
A partnership arrangement is similar to that of a sole trader but differs in that it has more than one owner. All partners own a specified percentage of the profits, and the liabilities, so they must pay tax on that percentage. As with a sole trader, each partner’s share of the profits is treated as their income.
Limited liability partnership (LLP)
In a nutshell, this type of structure has some of the same characteristics of a conventional partnership, such as the internal management, tax liability and the distribution of profits, but it also provides the limited liability of an incorporated company. Limited liability partnerships tend to be used by professional services firms such as solicitors and architects.
Limited Company (LTD)
In the case of a limited company, the business becomes a separate legal entity entirely. This means that the company must be formed, or incorporated, and registered at Companies House. It will also have to have certain standard legal documents that govern what it can do and what business it operates in. The company will be owned and controlled by those who own its shares and you can allocate shares to any number of people when the company is incorporated. This does however require more administration, for example annual accounts being filed at Companies House and an annual corporation tax return.