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Business Structure Helpsheet

11/11/2014

 

 

Cotton Accountancy Services Limited

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Chartered Accountant and business adviser

Tel: 0161 4393358

Mob: 07759 857527

 

 

 

 

Business Structure Helpsheet 

 

There are three main structures available to small businesses:

  1. Sole Trader;

  2. Partnership; and

  3. Limited Company

 

Each business owner will need to consider these options and determine which is most appropriate for them. Having chosen a structure, this is not the end of the story. As the business changes or grows over time, it may be necessary to reassess the suitability of each structure.

 

This helpsheet summaries the key features, benefits and disadvantages of each structure. 

 

 

Contact us at www.cottonaccountancy.co.uk to help you decide which is most suitable for your business.

 

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  1. Sole Trader

With a sole tradership, there is a single owner of the business. This structure tends to be popular with smaller operations, where turnover and the number of employees are low. The business will be assessed for tax under self-assessment of income of the business owner. The sole trader also pays class 2 NI contributions on a flat-rate weekly basis and class 4 NI contributions on profit.

 

Key advantages

  • It is very easy to set up, and you can begin to trade immediately.

  • It is very flexible. There is one key decision-maker and there are few regulations to comply with.

  • There is no legal requirement to produce accounts other than as needed for HMRC.

 

Key disadvantages

  • The owner is personally liable for all debts of the business.

  • The owner has unlimited liability, so their personal assets are put at risk if the business fails.

 

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  1. Partnership

In a partnership a group of people own the business. Each partner is liable to income tax under self-assessment for their share of the business profits. The maximum number of partners permitted is 20.

 

Key advantages

  • It is very easy to set up, and you can begin to trade immediately. A partnership agreement is not required.

  • There is no legal requirement to produce accounts other than as needed for HMRC.

  • The burden of ownership is shared and each partner can specialise, using their skills more effectively.

  • More owners means more capital can be raised than with a sole tradership. 

  • It is possible to limit the liability of partners who do not run the business.

 

Key disadvantages

  • The owners are personally liable for all debts of the business.

  • The owners have unlimited liability, so their personal assets are put at risk if the business fails.

  • Decision-making may be slower and more difficult than for a sole trader.

  • There is the risk of sharing the ownership with unsuitable people. You need to be able to trust your partners.

 

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  1. Limited Company

There is no limit on the number of owners (shareholders), and these owners may or may not be directors, who run the business. The company is a legal person, with its own identity, separate from the owners.

 

Key advantages

  • The shareholders have limited liability, meaning they only pay the amount they agree for the shares they buy. Their personal assets are not at risk if the company fails.

  • It is easier to raise capital, because shares can be sold to unlimited numbers of shareholders. Limited liability gives investors the confidence to invest.

 

Key disadvantages

  • It is more difficult to set up a limited company e.g. documents of incorporation must be prepared.

  • To protect shareholders the company must fulfil legal requirements, including filing accounts at Companies House.

  • Annual financial statements must be prepared and published to the shareholders for approval at the AGM.

  • Some companies may have to have their annual accounts audited. For more details see www.gov.uk/audit-exemptions-for-private-limited-companies

 

 

To help you explore these options in more detail, contact us at www.cottonaccountancy.co.uk.

 

This factsheet is intended to provide general information only and does not constitute advice. Before taking any action, you should get appropriate advice from a professional adviser which is based on your particular circumstances. We have done our best to ensure that the information in this factsheet is up to date as of August 2014.

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Registered office: 15 Regent Close, Bramhall, Stockport, SK7 1JA

Registered No: 9090241

Registered in England and Wales

Email: alison@cottonaccountancy.co.uk       Website: www.cottonaccountancy.co.uk