You might have written up your business plan and conducted all the appropriate market research, but have you considered how you want to structure your business? In this article, we’ve explored what business structure really means, how to register a business as a limited company, how to register as a sole trader, and the benefits of each.

What is a business structure?

In simple terms, business structure refers to the legal arrangement and formation of a company. This determines who takes responsibility for business decisions and how much tax you’ll be liable for.

What are the types of business structure?

There are two main types of business structures to choose from:

1.  Register a limited company

Setting up a limited company allows you to differentiate your business identity from your personal identity. It is possible to register your business as a limited company, even if you are the only employee.

2.  Set up as a sole trader

Registering as a sole trader means that you’re self-employed. As such, this is the most straightforward business structure, as your earnings and company profits are one and the same.

Similarly, you can also register your business as a partnership, which means you run it alongside one or more person. However, while all parties are equally responsible for losses and profits, you each legally continue to operate as sole traders.

Setting up a limited company

Knowing how to register a business as a limited company is more than simply setting up a website and beginning to trade; it’s a little more complicated than that. We’ve outlined why you might choose to set up as a limited company, how to go about registering, and the taxation involved.

What are the benefits of starting a limited company?

There are numerous benefits to setting up a limited company, from financial security to laying the groundwork for growth. We’ve outlined the five core advantages of starting a limited company:

1.  Limited financial liability

Because a limited company is run under its own identity, you, as the owner or director, aren’t liable for any losses or debts incurred beyond your initial investment. This limits the personal risk and gives you some financial security, even if your business ultimately works at a loss.

2.  Credibility

Setting up a limited company often positions your brand as credible and reliable. This is because consumers, customers, and clients recognise that your brand has permanence and is here to stay. Additionally, big businesses are much more likely to want to work with registered limited companies than independent sole traders, because there’s a greater sense of prestige.

3.  Growth and expansion

Because a limited company is able to employ staff, it is already set up with the foundations to expand. This means you can grow your business more quickly than if you start as a sole trader and later change business structure, whether you’re increasing revenue, employee count, or the areas you operate within.

4.  Uniqueness

Because each limited company has to register with Companies House, each business name is recorded. Subsequently, a name (or any name that could be considered too similar) can only be used by one business. This individuality can benefit your brand from a marketing point of view, as well as making it easier to find a unique domain name.

5.  Raising capital

In the early stages of your business development, you may require additional or startup funding . This is often made easier if you’re operating as a formally registered limited company. On the flipside, because a limited company is its own entity, it’s often easier to sell a part or apportion shares than if you operate as a sole trader.

How to set up a limited company

Setting up a limited company requires you to register your business with Companies House. This is a governmental department, who are responsible for managing all new and existing companies; they will issue you with a certificate of incorporation, which confirms your legal status and right to trade, as well as your company number and date of formation.

To register a business as a limited company, you will be required to complete the following forms:

  • Memorandum of association

A memorandum of association is a legal document signed by all initial shareholders, to demonstrate that they all agree to form the company.

  • Articles of association

Articles of association are simply the formalised rules of how the limited company will be run. This document should be signed by all shareholders and directors.

Registering a limited company for tax

Once you’ve established that you want your business to follow a limited company structure, it’s time to register for tax. The likes of National Insurance and business rates on working premises are standard professional taxes, limited companies are liable for one additional duty in particular: corporation tax.

Corporation tax is the main levy attributed to limited companies, and is an amount payable on all profits earned during a financial year. As it stands (as of May 2021), corporation tax is fixed at 19%, and, unlike personal income tax, doesn’t offer room for any tax-free allowances.

However, while this may be the case, corporation tax does offer a much more favourable rate once you begin to earn over a certain threshold. Additionally, there are a handful of tax breaks available to businesses, that are a little more difficult to access if you’re self-employed.

Registering as self-employed

Unlike registering a limited company, becoming self-employed is relatively easy and can be as simple as sitting down and building a website and brand. Within this section, we’ve explored the benefits of setting up as a sole trader, how to register as self-employed, and the taxes involved.

The benefits of setting up as a sole trader

Setting up as a sole trader comes with a series of benefits, including newfound freedom and flexibility. Discover the top five benefits of becoming self-employed:

1. Complete control

Registering as a sole trader allows you to work with total autonomy; you can run your business exactly the way you want, without having to jump through any hoops or consult directors, shareholders, or other interested parties. This allows you to focus entirely on your work, with the freedom to make business, marketing, and financial decisions on your own.

2.  The profits are yours

Unlike a limited company, where profits legally belong to the business, as it is its own entity, setting up as a sole trader allows you to claim all after-tax income that your company earns for yourself. You can either choose to set up a second bank account for your business profits, separate from your income and personal earnings, or keep all your finances within one space; the choice is entirely yours, as you and your company work under the same identity.

3.  Can offer a personal touch

While big businesses might favour working with limited companies, your independence is likely to be appreciated by countless smaller brands or clients that prefer a personal touch. Rather than getting bogged down in business processes, a sole trader can often offer far more character and personality than a limited business, which can be invaluable when it comes to selling your brand to customers.

4.  Flexibility

Just because you choose to be self-employed initially, you’re not tied to this decision forever. If you find that you’re outgrowing your sole trader business structure, you can simply get in touch with Companies House to incorporate your business and receive legal certification. If you’re uncertain at all about whether you should register as a sole trader or a limited company, the former offers more scope to change your mind.

5.  Privacy

Running a limited company means your financial, personal, and business details are readily accessible across the Companies House website. In contrast, acting as a sole trader means your details and business information isn’t available publicly. This means your competitors cannot access your data.

How to register as self-employed

Another massive plus point of registering as self-employed is how straightforward it is to set up your business. Rather than have to go through a process laden with form-filling and box-checking, you can get started almost right away.

As mentioned previously, your personal and professional finances are one and the same, as far as your legal status goes. So, all you’ll need to do is let HMRC know that you’re self-employed and you plan on submitting a tax return self-assessment. However, this does mean that you have a responsibility to keep records of all your business incomings, outgoings, and expenses.

Importantly, when choosing the name you wish to operate under as a sole trader, you cannot use any terminology that even closely suggests that you are a limited company; this means limited, LTD, and PLC are off the table. However, aside from this, there are very few limitations when it comes to choosing a sole trader brand name.

What are the taxes involved in registering as a sole trader?

As a sole trader, you aren’t required to pay corporation tax. Instead, you’re just obliged to pay income tax as you would as an employee. However, you will have to continue paying National Insurance, and may even have to pick up VAT payments:

  • National Insurance

As an employee, you pay Class 1 National Insurance on all earnings over £184. However, as a sole trader, you pay Class 2 (and 4) National Insurance; Class 2 applies to any profits over £6,515, at £3.05 a week, while Class 4 is a 9% tax on profits between £9,569-50,270. There is also an additional 2% tax on all additional profits over £50,270.

  • VAT

Value Added Tax (VAT) is paid on all goods and services sold by a business, and is a standard rate of 20%. However, the threshold for having to pay VAT is currently £85,000, so, until you earn this or more, you won’t have to opt in.

Choosing your business structure is a key step in making your company a reality. Setting up as a sole trader or as a limited company each come with benefits, so it’s up to your to determine which suits your business model best. For even more expert guidance, discover all there is to know about setting up a business or marketing your brand.