Ignoring, for now, charities and other specialist situations, there have traditionally been three principal methods of conducting business.
- Self employed, or sole proprietor. Start tomorrow! The easiest form through which to conduct business, you are your ‘own boss’ and the profits of your business are entirely yours – apart of course from the tax man’s share! For the ‘simplest’ of businesses, and where the total taxable income is not likely to breach the basic rate threshold, this may be the most appropriate vehicle. Your business profits will be subject to income tax and Class 4 national insurance, and the amount of tax payable will be determined by reference to your total taxable income in a tax year, less any allowances and reliefs to which you may be entitled. If your total income is high enough, you could be paying income tax at 40% or even 45%, and mitigating your exposure to high tax bills takes careful planning and considered advice. The real downside? You personally may be held liable for losses and any claims that may be made against the business; your liability is ‘unlimited’.
- Partnership. This is an arrangement under which two, or more, ‘self employed’ persons combine to carry on a trade or profession. Slightly more complex than the position of a sole proprietor, since the ‘partnership’ must also submit its own ‘tax return’ and, in the absence of any agreement to the contrary, is still governed by the Partnership Act of 1890. Nevertheless, the advantages of a partnership include the ability to share the burden of the workload, it may facilitate the combination of different skills and abilities. As with self employment, each partners ‘share’ of the profit will be subject to income tax. The downsides – again, liability is unlimited, and – breaking up can be hard to do….
- Limited Company. Let’s start with the downsides; cost of set up; you are creating a completely separate legal entity, with distinct responsibilities and greater administrative matters to address. It will be more costly to maintain, you will not only have to comply with and meet Revenue filing and reporting deadlines, but those imposed by the Companies Acts as well. BUT for companies with profits of £300,000 or less, the company will be liable to corporation tax at only 20%, shares ‘in the company’ enable the owner to draw ‘dividends’, which currently do not attract national insurance, and whereas under self employment the sole proprietor is assessable on the profits generally, as they arise, companies enable profits to be ‘retained’ and distributed at a time more favourable to the owner. Commercially, the limited liability company does precisely that – grant the owner of the business a degree of protection that is not available to the sole proprietor or partner. A company may also confer a greater degree of credibility in dealings with clients and suppliers alike.
Which vehicle will be best for you will depend upon your personal circumstances as well as the nature of the business sector that you are joining; many factors need to be considered, and these are discussed in the Section 2 which deals with planning.
There is a further trading vehicle, the
- Limited Liability Partnership. Currently this appears to be the vehicle of choice for established professional partnerships – accountants and solicitors, for example. In very simplistic terms the limited liability partnership can be seen as a hybrid of the ‘partnership’ and limited company. At least one partner must bear the burden of ‘unlimited’ liability, but as with a partnership, the profits are subject to income tax and Class 4 national insurance, rather than corporation tax.
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