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Information and advice for business:

What type of business structure is right for you.
UK tax rates and thresholds
Accounts and other filing deadlines and late penalties

Business legal structures:
the basics

Introduction

Self-employment

Sole trader

Partnership

Limited liability partnership(LLP)

Limited liability companies

Social enterprises

Guide to Tax rates, thresholds
and fees

 

 
 
 

Useful information section

Welcome to our information page. In this section you will find general information on the different structure of businesses that are available as well as their responsibility to HM Revenue and Customs, Companies House and various tax resposibilities. You will also find a general guide to tax rates and thresholds. Select the links on the left to navigate to the desired section.

 

Business legal structures: the basics

Introduction

To put your business on a proper footing with HM Revenue & Customs (HMRC) and other authorities, you need to make sure that it has the right legal structure. It's worth thinking carefully about which structure best suits the way that you do business, as this will affect:
  • the tax and National Insurance that you pay
  • the records and accounts that you have to keep
  • your financial liability if the business runs into trouble
  • the ways your business can raise money
  • the way management decisions are made about the business

There are several structures to choose from, depending on your situation. If you are not sure which legal structure would best suit your business, contact us for advice.

 

Self-employment

To be a sole trader, a partner, or a member of a limited liability partnership as an individual rather than a company, you must be self-employed - and registered as such with HM Revenue & Customs (HMRC). This does not mean that you can't also do other work as an employee, but the work you do for your own business must be done on a self-employed basis.

If you are not sure whether this work counts as self-employment, ask yourself these questions:
  • Do you present your clients with invoices for the work that you do for them?
  • Do you carry out work for a number of clients?
  • Are you responsible for the losses of your business as well as taking the profits?
  • Can you hire other people on your own terms to do the work that you have taken on?
  • Do you have control over what work has to be done, how the work has to be done and the time and place where the work has to be done?
  • Have you invested your own money in your business or partnership?
  • Do you provide any major items of equipment which are a fundamental requirement of the work you carry out?
  • Do you have to correct unsatisfactory work in your own time and at your own expense?

If you can answer 'yes' to most of these questions then you are probably self-employed already, and should let HMRC know this immediately if you have not already done so. You may be fined £100 if you fail to register within three months of becoming self-employed. (Back to top)

 

Sole Trader

Being a sole trader is the simplest way to run a business: it does not involve paying any registration fees, keeping records and accounts is straightforward, and you get to keep all the profits. However, you are personally liable for any debts that your business runs up, which make this a risky option for businesses that need a lot of investment.

Set up
  • You need to register as self-employed

Management and raising finance

  • You make all the decisions on how to manage your business
  • You raise money for the business out of your own assets and/or with loans from banks or other lenders
Records and accounts
  • You have to make an annual self assesment tax return to HM Revenue & Customs
  • You must also keep records showing your business income and expense
Profits
  • Any profits go to you
Tax and National Insurance
  • As you are self-employed, your profits are taxed as income.
  • You also need to pay fixed - rate Class 2 and 4 National Insurnce Contributions on your profits
Liability
  • As a sole trader, you are personally liable for any debts run up by your business. this means your home or other assets may be at risk if your business runs into trouble. (Back to top)

 

Partnership

In a partnership, two or more people share the risks, costs and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.

Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved - although the business can still continue.

A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.

Setup

  • Each partner needs to register as self-employed
  • It's a good idea to draw up a written agreement between the partners
Management and raising finance
  • Partners themselves usually manage the business, though they can delegate responsibilities to employees
  • Partners raise money for the business out of their own assets, and/or with loans
  • It's possible to have 'sleeping' partners who contribute money to the business but are not involved in running it
Records and accounts
  • The partnership itself and each individual partner must make annual self-assessment returns to HM Revenue & Customs (HMRC)
  • The partnership must keep records showing business income and expenses
Profit
  • Each partner takes a share of the profits
Tax and National Insurance
  • As partners are self-employed, they are taxed on their share of the profits
  • Each partner also needs to pay Class 2 and 4 National Insurance contributions
Liability
  • Creditors can claim a partner's personal assets to pay off any debts - even those debts caused by other partners
  • In England, Wales and Northern Ireland, partners are jointly liable for debts owed by the partnership and so are equally responsible for paying off the whole debt. They are not severally liable, which would mean each partner is responsible for paying off the entire debt. Partners in Scotland are both jointly and severally liable
However, if a partner leaves the partnership, the remaining partners may be liable for the entire debt of the partnership. Also, a creditor may choose to pursue any of the partners for the full debt owed in the case of insolvency. (Back to top)

 

Limited liability partnership (LLP)

An LLP is similar to an ordinary partnership - in that a number of individuals or limited companies share in the risks, costs, responsibilities and profits of the business.

The difference is that liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. This means that members have some protection if the business runs into trouble.

Set-up
  • Each member needs to register as self-employed - see the page in this guide on self-employment.
  • There must be a minimum of two designated members - the law places extra responsibilities on them.
  • If the LLP reduces in number and there are fewer than two designated members then every member is deemed to be a designated member.
  • LLPs must register at Companies House.
  • It's a good idea to draw up a written agreement between the members. For further advice, consult an accountant or solicitor.

Management and raising finance

  • Usually the members manage the business, but can delegate responsibilities to employees.
  • Members raise money out of their own assets and/or with loans.

Records and accounts

  • The LLP itself and each individual member must make annual self-assessment returns to HM Revenue & Customs (HMRC).
  • All LLPs must file accounts with Companies House.
  • An annual reminder letter will be sent to the LLP a few weeks before the due date requesting they download the form from the Companies House website. It needs to be completed and returned to Companies House with the appropriate fee.
Profits
  • Each member takes an equal share of the profits, unless the members agreement specifies otherwise.

Tax and National Insurance

  • Members of a partnership pay tax and National Insurance contributions (NICs) on their share of the profits.
  • The profits of a member of an LLP are taxable as profits of a trade, profession or vocation and members remain self-employed and subject to Class 2 and 4 NICs. (Back to top)

 

Limited Liability Companies

Limited companies exist in their own right. This means the company's finances are separate from the personal finances of their owners.

Shareholders may be individuals or other companies. They are not responsible for the company's debts unless they have given guarantees (of a bank loan, for example). However, they may lose the money they have invested in the company if it fails.

The Companies Act 2006 makes a number of changes that will affect directors and shareholders of limited companies. You can read about the Companies Act 2006 on the Department for Business, Innovation & Skills (BIS) website - Opens in a new window.

Main types

  • Private limited companies can have one or more members, eg shareholders. They cannot offer shares to the public.
  • Public limited companies (plcs) must have at least two shareholders and must have issued shares to the public to a value of at least 50,000 before it can trade. View the guide to company formation on the Companies House website - Opens in a new window.
  • Private unlimited companies - these are rare and usually created for specific reasons. It is recommended you take legal advice before creating one.

Set-up

  • Must be registered (incorporated) at Companies House.
  • Must have at least one director (two if it's a plc) who may also be shareholders. Directors must be at least 16 years of age. At least one director must be a person.
  • Private companies are not obliged to appoint a company secretary but if one is appointed this must be notified to Companies House. Public limited companies must have a qualified company secretary.

Management and raising finance

  • A director or board of directors make the management decisions.
  • Finance comes from shareholders, loans and retained profits.
  • Public limited companies can raise money by selling shares on the stock market, but private limited companies cannot.

Records and accounts

  • Accounts must be filed with Companies House before the time allowed for filing those accounts to avoid a late filing penalty.
  • Accounts must be audited each year unless the company is exempt.
  • When you file your Annual Return for the first time a letter will be issued to the Registered Office containing the company's authentication code and instructions for use of Companies House web filing services.

Directors are responsible for notifying Companies House of changes in the structure and management of the business.

Profits

  • Profits are usually distributed to shareholders in the form of dividends, apart from profits retained in the business as working capital.

Tax and National Insurance

  • If a company has any taxable income or profits, it must tell HM Revenue & Customs (HMRC) that it exists and is liable to corporation tax.
  • Companies liable to corporation tax must make an annual return to HMRC.
  • Company directors are employees of the company and must pay both income tax and Class 1 National Insurance contributions on their salaries.

Liability

  • Shareholders are not personally responsible for the company's debts, but directors may be asked to give personal guarantees of loans to the company.(Back to top)

 

Social enterprises

A social enterprise is a business with primarily social objectives. Any profits are largely reinvested in the business or in the community, rather than given to shareholders and owners.

There are many different types of social enterprises, including community development trusts, housing associations, worker-owned co-operatives and leisure centres.

Social enterprises may take a number of different business structures - the most common are companies limited by guarantee, companies limited by shares, and industrial and provident societies. (Back to top)

 

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