Which Is The Right Structure For Your Business?

Which Is The Right Structure For Your Business

It is essential to choose the structure of your company and identify the legal requirements. This will impact how you run your business, what you do in the future, and most importantly, the amount of tax you pay.

You can start a home-based business of any type, including a nail salon or pet grooming service. Before you move on to the next step, it is important that you decide which type of legal structure you will use for your venture.

These are the three most common types of business structure.

There are many business structures, but there are three types you should be familiar with when starting a home-based company: Sole Trader (or Partnership) and Private Limited Company (or Private Limited Company). * Below is a list of all types of business structures, along with their benefits and disadvantages. Also, we will show you how to set them up and what costs they are likely to cost.

There are other options, such as Private Unlimited Companies, Public Limited Companies, and Right-Manage Companies. But they’re not necessary to be worried about. Your lawyers can help you sort out your legal issues if your business grows and expands.

1. Solo Trader

The simplest and easiest way to start a business is as a sole trader. Registering your business is free, and you can start up immediately. Profits are yours after taxes. Unfortunately, if your business fails, you will be personally responsible for any debts. This means that your home and other assets could be taken.

The Advantages

No registration fees and fast start-up
Accounting and minimal records
You have more flexibility when you control where and when you work
You have more privacy because you don’t have anyone to answer to
Profit after taxes is yours and only yours

The disadvantages

Any debts you incur are your responsibility.
All legal requirements and paperwork associated with submitting your annual tax bill and paying your National Insurance Contributions (NICs) are your sole responsibility.
Insurance premiums like life, home, and auto are generally higher.

How to Become a Sole Trader

Register with HM Revenue & Customs online. After you register, you will receive a self-assessment tax return which you must complete for each tax year (6th April through 5th April). The kind folks at HMRC will then calculate the amount you owe. You must notify HMRC immediately if you have already filled out an annual tax return.

See also  Want to Be an Internet Entrepreneur But Can Not Find a Niche?

Keep these records

All business-related expenses and income are recorded in general bookkeeping.
Employing people requires that you either contract them as suppliers and keep track of the costs, or if they are full-time employees, calculate their monthly income tax and NICs using Pay As You Earn (PAYE).
How much will it cost you?

Any profit is subject to income tax
National Insurance Class 2 at the fixed rate
National Insurance Class 4 on all profits
If you’re an employer, pay PAYE

2. Partnership

A partnership with a business partner is the best option if you don’t feel like going it alone. A partnership is simply two or more self-employed individuals working together to share the workload and any profits. Although it is not required by law to have a formal agreement, I highly recommend it. It’s like any relationship. There are good intentions and shared goals, and sometimes it ends in tears. My best friends and I set up a partnership once. It was a great experience for almost three years until things started to fall apart. It was a lengthy court battle to “divorce” our partnership. This resulted in two names being removed from my Christmas card list.

The Advantages

No registration fees and fast start-up
Although it is recommended, there is no formal agreement.
Accounting and minimal records
Someone to share ideas and the burden of work
Risk and cost-sharing
All profits after taxes are shared among the partners

The disadvantages

A simple partnership is not only responsible for the debts of the entire partnership but also any debts incurred in the partnership by other partners. This applies regardless of whether or not you have agreed to the expenditure.
Profits are shared in equal amounts regardless of actual work contribution.
Both of you are jointly responsible for all legal requirements and paperwork associated with your annual tax bill submission and payment of your National Insurance.
Insurance premiums like life, home, and auto are generally higher.

How to Form a Partnership

Each partner must register with HM Revenue & Customs individually (even if one of the partners has already filed an annual tax return), or they could be fined! Optional: A deed of partnership that outlines the business’s management and the responsibilities of each partner. To form a partnership, you don’t need to consult a lawyer. Simply draw up and sign a mutually acceptable division of profits. Also, be clear about what will happen in the event that the partnership fails.

See also  Why You Need To Hire A Business Coach

The Records You Need to Keep

Nominated officers are those who assist in submitting the annual partnership tax returns.
General bookkeeping of income and expenditure for all business-related expenses incurred by each partner
A partnership statement that shows how profits (or loss) were divided among the partners
In most cases, each partner will be responsible for paying their own Income Tax and National Insurance Contributions.
You must either hire people as suppliers and keep track of the costs or, if you have full-time employees, calculate your PAYE.

What it will cost each partner

Any apportioned profits are subject to income tax
National Insurance Class 2 at the fixed rate
National Insurance Class 4 on any apportioned profit
If the partnership employs people, PAYE
2b. Limited Liability Partnership

An LLP is different from a regular partnership in that the business is liable to the business’s debts and not the partners. This provides tax benefits compared to a normal partnership, as well as protection for partners against personal bankruptcy and other debts. The rest of the details required to form and run an LLP partnership are listed above. However, it is likely that accounts will need to be audited by Companies House and filed.

3. Private Limited Liability Company

A Private Limited Liability Company is a good choice if you want to be protected against any business failures. Although the company is owned by its shareholders, it is a separate legal entity. The structure of the company limits shareholders’ liability to the amount of the shares they have issued. This means that your personal assets cannot be affected if the company goes under. The minimum share capital is not required, but shares can’t be offered to the public. Any profit earned is paid out to shareholders as a dividend.

The Advantages

Separate business and personal finances
You don’t have to pay if the business goes under.
A business partner is generally considered safer than a sole trader, partnership, or partner.
The disadvantages

There is a lot of paperwork and many more rules.
A certificate of incorporation from the Registrar of Companies is required before you can trade. Companies House will pass your information to HMRC automatically, but you need to notify your local HMRC office about the existence of your company.

Keep these records

Everything from letterheads to invoices, website to emails must clearly display your company’s name, registered number, and place of registration.
Bookkeeping detail for all business-related expenses
All payments to salaried employees, directors, and contractors
Self-assessment to determine the amount of corporation tax that must be paid
How much will it cost

See also  How To Effectively Manage Remote Employees

All profits subject to corporation tax
All employees and directors are eligible to receive monthly income tax and national insurance contributions from PAYE.

Value Added Tax (VAT).

No matter what business structure you choose to use, you must register for VAT if you expect your business to exceed the PS77,000 annual turnover. You can put off registering for VAT if you don’t think your business will exceed the current PS77,000 per year. However, you should be vigilant about your monthly numbers! HM Customs and Excise can access your home without a warrant and seize any items they feel are related to their inquiry. They have more power than the police. Two hours’ notice was given to me about the visit of Mr. Pratt, an inappropriately named member of the VAT office. He proceeded with his auditing of my returns with incredible insight. He or HMRC was several thousand dollars richer by the time he left my office.

Moral: Don’t mess around with the VAT office

 

Sister, Daughter, Wife, Mother, Entrepreneur, PR Consultant, and Mother of Three

Like many women, I find it difficult to manage all of my roles. Other days, I might only have three to four. Homeforbusiness was born. I understand what it means to be a working mum and how to start an online business with all the ‘pulls’ of daily family life and work.

In my 30s, I started EMA Productions, my first corporate communications company. It worked with large corporate clients like Texaco, Rank, and Boots. Although it was hard work and challenging, it was very successful. With the support of my amazing team and office, I was able to focus on the task at hand: winning contracts and meeting clients’ needs.

HomeforBusiness is something that I am passionate about. I believe many people want to have a better life and work remotely. There are many genuine opportunities available to people, but most people don’t know where to begin. HomeforBusiness is a platform that empowers anyone who wants to make a living from home. A panel of experts will be sharing real business opportunities, tips on online marketing, how to run a business, and other health and wellness tips with me. My top free online resources are also included.