When you decide to start a business, the first important decision to be made is how you will register your business – will you be a sole trader or a private limited company; or maybe you’re looking to start an LLC or a charity? In this article we look at the different types of company form, their pros and cons and what each of these mean.
This is usually decided based on the service your business provides but what should also be considered is how much funding you have, the industry you are in, how many people are setting up together and your projected income.
Max Abramov, CEO at TaxScouts, sums up the difference as being all about the individual:
Small enterprises and self-employed tradespeople may prefer the simplicity and control over earnings offered by sole trading, while those with ambitions of starting a larger company with lots of employees might be tempted by the security that registering as a limited company offers.
Of course, you can always change what kind of company you run, but getting it right at the beginning will save time, money and a whole lot of stress. For more info on getting it right first time, have a look at our ‘how to write your first business plan article’, which comes with a free Zervant template.
This, as the name suggests, is the type of business that has the least strings. You can work as often as you like and you are not employed by a company and can work for whoever you like.
Pros of freelancing
- Freedom to work anywhere and for anyone
- Very few overheads, such as rent
- Lower taxation – up to a certain point
- Set your own rates
Cons of freelancing
- Lack of guaranteed work
- Companies will often have to pay your contributions
- Overshadowed by bigger companies
This is the simplest form of business and requires the least amount of external regulation. It essentially means you run the business by yourself and for yourself, with minimum external involvement, and is known as ‘unlimited liability’.
Gorillaccounting.com describes being a sole trader as:
More control for you. You run your business the way you want, without interference from anyone else, from daily tasks to strategic decision making…You can make decisions, act on them quickly and meet your clients’ needs without delays.
Pros of being a sole trader
- Low running costs
- Entitled to keep all profits
- Tax and national insurance – Self Assessment Tax Return
- No limit to what you can earn
Cons of being a sole trader
- Higher tax brackets can bring much higher taxation
- Responsible for all personal assets
- Hard to keep running – long hours, poor holidays
- You don’t get paid for time off
As the name suggests, this is when you get together with one or more partners and set up a business between you. Here, you share all profits and losses equally and both (or more) of you sign up as self-employed but enter into a business agreement. There are 434,000 of these in the UK and you will often see them in action when you visit a doctor or dentist surgery.
However, please make sure you are going into business with the right person. Motivational speaker Shed Simove says:
Working relationships are PIVOTAL to the success of a business. Before you work with someone new, if at all possible, give them a small job or task to do first, to check if you and they have the same work ethic and way of operating.
Pros of partnership
- You don’t have to set up a corporate company, even though there may be a few people involved
- Retain all the benefits of being self-employed
- Reduced time pressure
- Greater specialisation
- Each partner pays their own tax on profit share
Cons of partnership
- You’re personally responsible for all debts and liabilities
- You are liable for others’ negligence or misconduct
- You have to share profits with others
- Making decisions is harder
A Limited Liability Partnership, or LLP, is similar to a partnership but has one major distinction. This is the newest type of business structure in the UK and, in this set-up, a partner’s liability is capped at the amount of money or capital they put into the business.
For this reason, this kind of business requires much more paperwork, registration and accounting – all of which is designed to keep you are your assets protected.
Before opening for business, you will need to register your company at Companies House – something that is not required as a sole trader or partnership.
Pros of LLP
- Retains many benefits of a partnership
- Can be turned into an incorporated company with two or more members
- An LLP agreement sets out responsibilities and profit share in advance
- More freedom to earn more money without high tax brackets
Cons of LLP
- Requires additional set-up and costs
- Members must submit a personal SATR, pay income tax and Nat Ins
- Annual accounts need to be prepared and filled
This is often the type of business that people who have experience or money behind them will opt for straight off the bat. For example, if you are setting up a dog walking business or a one-man personal trainer business, there is almost nothing in this type of venture that will be of benefit to you. Maybe one day, though!
Here, the business is owned by shareholders and run by appointed directors. It is also a legal entity of its own and therefore had to have its own legal rights and obligations.
Pros of limited companies
- Finances are kept separate from the individual owner
- Decisions made at business level rather than individually
- Profits kept by the company after corporation tax is paid
- Profits then distributed in dividends
- Easier to borrow money in the long-term
- You receive a set wage
Cons of limited companies
- Annual reporting & filing requirements with Companies House & HMRC
- Takes complete control away from you as a business owner
- Is expensive to set up and run
- Relies on making large profits to survive
- Criminal liability not on the individual
To set up your business, visit the ‘setting up a business’ section of the UK government’s website here. Within the page, there are direct links to the correct registration pages.
Please don’t get too overwhelmed by this. Yes, it takes some research, but it will become clear quite early which bracket you fit in to.
Don’t forget to have a look at our blog page as well, which is packed full of helpful articles designed to make setting up your own business as smooth as possible. Good luck!