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Does your business structure work best for you?

Written by Evelyn Adfield | 17-Feb-2014 15:06:59

With the rush of the 31 January deadline for tax self-assessment behind us for another year, business owners may well turn their thoughts to whether they are operating in the most advantageous way, whether as a sole trader, partnership, limited liability partnership or company.  Indeed, for many starting out in business or a few years down the line, this question is key.

Whilst sole traders and partnerships can enjoy the benefits of reduced administration, privacy, flexible use of losses and lower tax on capital gains, there are certain disadvantages that go with this type of business set up, with the greatest being personal responsibility.  Both sole traders and individual partners within a partnership assume personal liability for all costs and losses of the business, meaning that in troubled financial times their personal assets, savings and even their homes may be on the line.

Faced with this reality, the time may be right to consider a move into a more formal business structure, such as a limited company.  The most obvious advantage of this type of business set up is limited liability.  Assuming a business owner has not entered into personal guarantees in respect of the business, if the company fails and cannot pay its debts and becomes insolvent, personal assets will be protected and the prospect of bankruptcy avoided.

Aside from protecting the business name, a limited company structure often adds the benefit of commercial credibility and confidence with customers and suppliers.  It suggests an air of status, even if that is not the case, and can prove the vital difference in securing a big client. Even more attractive may be the likely tax advantages, with company profits being taxed at corporation tax rates which are typically lower than income tax.  In general and with the correct advice, individuals can make a significant tax saving by converting to a limited company.

There is, of course, increased cost and administration associated with running a company, as well as the public availability of shareholder and financial information, which many business owners find unappealing.  However, for the most part, these downsides are far outweighed by the personal protection, financial benefits and apparent boost to business reputation.  Indeed, in many cases business owners are surprised to learn that the time and costs associated with incorporating and maintaining a limited company are not as high as expected.

Our Corporate Commercial team is experienced in acting for a broad range of businesses including local sole traders, partnerships and small owner-managed companies.  We would be happy to discuss your options and which structure may be best for you and your business.