A business can operate in a number of structures…
A Sole Trader – simply one person working on their own. Ideal for many small businesses, but with the risk that a financial catastrophe puts all their wealth at risk. Tax is payable each year on the profits made even if these are not spent by the owner.
Partnerships. The same as a sole trader but where two or more people work together. Again, financial risk if there is a disaster, so no longer a popular business structure. The tax is also due on the share of profits regardless of each partner’s spending
Limited liability partnership (LLP). This is now the common option for those that do not wish to operate as a company. Each partner is taxed on profits rather than spending, but financial risk is limited to only the wealth within the business.
A Limited Company. This is a legal entity in its own right. Owners have shares in it that can carry rights to vote, a share of value and a share of income, whilst at the same time being an employed director in the business. Tax is payable on the company profits at lower tax rates than for individuals, and the shareholders are taxed only on what they withdraw from the company.
Like an LLP, financial risk is limited to only the value within the company and all personal wealth is safe
There are more complex structures such as groups involving Holding companies or charities depending on the size and type of business and it is important to understand all the aspects such as risk, tax and regulatory requirements.
Our role is to get an understanding of your goals and ambitions as well as your personal finance needs to support you in identifying which business structure is best for you.
For more information take a look at our blog Are you running your business in the right structure?