Starting a new business post-Brexit might still be shaking your confidence in pursuing your goals of finally becoming self-employed and having your own company. However, seizing opportunities after the transition and focusing on the advantages of what the UK’s departure from the EU will bring into your business is a logical move for any bold entrepreneur willing to adapt into the new rules and system. Of course, challenges and consequences should be expected. But the most important thing to remember is that the UK labour market is strong and has a favourable environment for entrepreneurs. As a matter fact, the UK ranked 8th on World Bank’s “Ease of Doing Business 2020” report, which puts Great Britain as the second-best place to conduct business in the G7 after the United States. Further, a 2019 report from the Institute of Directors declared that 62% of UK companies have no Brexit-related relocation plans, a good indicator that the UK remains a major stronghold of global businesses in Western Europe despite Brexit. For now, your main focus should be taking the right steps on how to set up your business. Once you’ve decided the kind of trade you want to engage in, identify which legal structure your business fits into. Do you want to register as a sole trader, a limited company, or a partnership? Let’s break down what the legal structure of a business is all about, why it is important to register and how it could protect your business.
Why is a legal UK business structure important?
Small businesses benefit greatly when registered to a type of business structure. Each structure significantly impacts your tax payment and legal liabilities. Sole proprietorship is the most common legal structure in the UK according to The Department for Business, Innovation and Skills. In 2020, the UK private sector business population, with an estimated 6 million businesses, has 3.5 million sole proprietorships (59% of the total), 2 million actively trading companies (34%), and 414,000 ordinary partnerships (7%). Whether you’re setting up a small or large business, it is mandatory that you choose the most appropriate legal structure. So, what are your main options?
A sole trader is basically the sole owner of the business. You, as an individual, are legally distinct with your business. Your profits, regardless of whether you keep it separately from the business, will be taxed. Sole traders can hire employees but since the majority of businesses under this structure don’t have a staff (4.6 million non-employing businesses of the total UK private sector business population), they organise their own annual self-assessment tax return.
A limited company has a separate legal identity that is distinct from its shareholders (owners) and directors (managers). Even if you’re acting as both the shareholder and manager of the business, the company is still its own legal entity. Company profits belong to the business and not the individuals. Any business debts or losses is not a personal responsibility by its owners who have limited liabilities. The company pays Corporation Tax instead of Income Tax.
Partnership is simply setting up a business with a partner when you don’t want to go as a sole trader or a limited company. Both you and your partner/s equally share the responsibility of the business— business expenses, profits, and tax payments as well as the losses and legal issues that may arise. A business partnership has unlimited joint liability, which is disadvantageous because both partners will share the liabilities and losses that the business will incur.. Any conflict that may arise in this type of structure could potentially lead to dissolve the partnership.
Advantages and disadvantages of sole trader and limited company
Switching from sole trader to limited company
Having a limited company business structure is an advantage to a company’s tax position. Sole traders pay Income Tax and National Insurance while limited companies only pay Corporation Tax, which has a lower rate than Income Tax. When your small business successfully starts earning a considerable amount of profit, switching to a limited company will be greatly beneficial to your growing business. Firstly, it is tax efficient since you will have one tax payment. However, keep in mind that a limited company is not entitled to a personal allowance. Secondly, you can be the shareholder and director of the company, and have limited liability protection. Thirdly, it will improve your company’s reputation and credibility among clients and investors.
Here are 5 important things you need to now when switching to a limited company:
- Register online through Companies House and pay £12 for the registration fee. Your business will be registered within 24 hours.
- When registering your business name, Companies House has a list of sensitive words and phrases you’re not allowed to use.
- The company director should prepare and send a personal Self Assessment Tax Return annually to the HM Revenue and Customs.
- Keep records about the company (information about the shareholders, company loans and payments, shareholder votes and resolutions, etc.) and accounting records. You can get disqualified as the company director and be fined £3,000 if you fail to have accounting records.
- Hire a reliable accountant to manage your company’s financial records.
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