In this post, we discuss:
- Sole Trader
- Partnership
- Limited liability partnership
- Limited liability company
Although this post relates to the UK business structure, there are similarities in the global types depending on the liability. Sole trader in the UK is the same as in Australia Sole trader | ABR, and similar to Sole proprietorships in the US. Limited company in the UK is Proprietary Limited in Australia and similar to Corporation in the US (Choose a business structure | U.S. Small Business Administration).
Let us compare all of the business types, which is useful if you are new to business and looking which type to choose. Understanding of the business type is equally crucial to the bookkeepers and accountants, as it linked to a different tax treatment.
Sole Trader
A sole trader is far the easiest form to start a business and run by one person, who needs to register for self-assessment with the HMRC tax office once you start trading, registration link. Your tax year is from 6th April of one year to 5th April of next year and both filing of self-assessment report and tax due by 31st January following the tax period end.
The advantage of this type is its simplicity to start, full ownership, and fairly straightforward tax filing. The tax related to this type is income tax. A sole trader does need basic bookkeeping to produce a report showing income after deduction of all expenses. The financial reporting is not submitted to the tax office and is not available publicly.
The downside of this type is full responsibility for losses, there is no separation between business and personal. This can be mitigated with the right insurance products.
Partnership
Similar to the sole trader structure, this business is run by more than two individuals, referred to as partners. Partner can also be a limited company, in this sense partner is a “legal person”. To set up this business, it needs to have a nominated partner, responsible for bookkeeping and tax filing. Although similar there are no financial reports filed with the tax office, there must be a good level of record keeping.
There should be also a partnership agreement, stipulating the share of each partner. This share is for the distribution of income. Each partner files their income through their own self-assessment. Register for a partnership with the HMRC.
The advantage on top of the sole trader above, would be a potentially easier way of raising funds.
The downside is that all partners are liable for the losses of the business.
Limited Liability Partnership – LLP
This is an incorporated business structure, limited by shares or limited by guarantee. Shareholders who have invested in this business may be different from those who are managing the business. The personal investments of shareholders are protected if the company goes bankrupt. What happens in reality during insolvency is that shareholders are to be paid out first, before other creditors. During insolvency, shareholders can only lose what has been invested in shares.
There is typically at least one director, secretary and guarantor. To register online with the tax office you need to have a business name, address, at least one shareholder, at least one director (could be the same as a shareholder), and rules about the company known as “articles of association”. The company can be set up online, here is a link to the company’s house.
The accounting period starts once your company is registered, but can be changed on the company’s house. Typically an accounting period is 12 months, with corporation tax paid on the profit. The income statements and balance sheet are delivered within 12 months from the accounting period end and tax payment should reach the tax office within nine months and one day.
There are penalties for not filing the reports on time or not paying.
Companies House also requires an annual statement to re-confirm information held and is used to submit any changes in business, such as shareholder or addresses. There are forms available on the account to make any changes throughout the year as well.
Accounting records should be kept well and available for tax office investigation or check. Therefore it is advisable to use Xero QuickBooks, or any other software to maintain records in order. The tax office accepts both paper and digitally stored bookkeeping records. In addition, the software keeps an audit trail, which is useful during the investigation.
If a company has not traded for over a year, it is considered dormant, and a dormant filing must be submitted to Companies House.Financial reports and business information are publicly accessible on the Companies House beta website.
The main advantage of setting up a limited company is liability separation: personal and business.
The main downside of this structure is set-up costs, accountant and bookkeeping payments, and admin related to running the business.
I hope this information on the business types was useful, by now you should identify various business structures.
What’s Next:
- What Bookkeepers Do. A Typical Day.
- Business Documents
Learn from the beginning: