What is the Right Business Structure for Your Startup?

Choosing the right business model is crucial for the long-term success of a new business. The decisions you make early on can have a significant impact later on. In this article, we will discuss two common options for starting a business: setting up as a Sole Trader or incorporating as a Limited Company.

Startup Option 1 – Sole Trader

Being a sole trader is the most common and simplest business structure in the UK. It involves fewer legal formalities compared to setting up a Limited Company, allowing you to start trading right away. As a sole trader, you also have fewer administrative responsibilities, which means lower administrative expenses. Taxation is generally simpler too, with the same tax rates applied as for employment income (20%, 40%, or 45%).

Startup Option 2 – Limited Company

A Limited Company is a separate legal entity from its owners. This means that the business owner’s personal assets are usually protected if the company faces financial difficulties or legal proceedings. Operating as a Limited Company can enhance your professional image and make it easier to establish business relationships. However, establishing and running a Limited Company can be more costly compared to being a sole trader. There are also more annual deadlines to meet, but a good accountant can help you stay on top of them.

Taxation for Limited Companies is a bit more complex. They pay Corporation tax at a rate of 19% on all taxable profits (up to £50,000), which increases to 25% for profits above that threshold. The business owners are then personally taxed on any money they extract from the company. The advantage is that this cash can be taken as a ‘dividend,’ which is currently taxed at lower rates (8.75%, 33.75%, or 39.35%) compared to the income tax rates (20%, 40%, or 45%).

Choosing Between the Two Options

To make this decision easier, ask yourself if you need to take out all the profits from your business. If the answer is yes and you intend to live off all the business income, being a sole trader is likely the most tax-efficient option for you. On the other hand, if you plan to reinvest profits in the business for growth, a Limited Company may be better. The leftover profits can be extracted later in a more tax-efficient way, such as through pension contributions.

There are other factors to consider as well

  • If you are already a sole trader and paying tax at a higher rate or expect your business profits to exceed £50,000, a Limited Company may result in lower taxes.
  • If you have family members who could benefit from the income, owning a Limited Company allows you to share ownership and distribute income to individuals who pay lower tax rates.
  • If your business pays for lifestyle assets like a car, being a sole trader provides better tax relief for vehicles compared to a Limited Company.

Long-term planning should also consider Inheritance Tax. For example, premises used in a Sole Trader business qualifies for 100% Business Property Relief from Inheritance Tax, whereas the rate drops to 50% when operating through a Limited Company.

Other Business Structures

While partnerships and limited liability partnerships (LLPs) are other options, sole traders and limited companies are the most commonly used business structures in the UK.

Always seek professional advice

Remember, every business is unique, and what works for one may not work for another. Use the information provided to make an informed decision based on your specific circumstances. If you would like any information on choosing the right business structure for your startup or would like any accountancy advice then please don’t hesitate to contact me at sam.morris@ballardsllp.com

Disclaimer. This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.

For more information about our services and how we can help your business please get in touch.
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