I get asked a lot of questions about what type of company people should set their business up as. There is no right or wrong answer to this question as it is down to a personal preference. However, I have outlined below some of the main points about some of the most common types of businesses.
Sole Trader (Self-Employed): The description is in the name – you run the business on your own and the profit is your income. A sole trader you are required to register with HMRC as a business, file a self-assessment at the end of every tax year, pay tax on all of the profits and you are responsible for your own NI. You can still have staff (employees). You alone are responsible for any debt the business has. Apart from trademarking your business name, there really isn’t anything protecting the name you’ve chosen.
Limited Company: A limited company is owned by those who hold shares in it. Everything is separate from your personal finances and the company is responsible for its own debts. All profit that is made belongs to the company, and it must file a corporation tax return at the end of the financial year. The name of the company is protected as you must register with Companies House. Each company must submit statutory accounts and an annual return to Companies House. Directors must submit a self-assessment to HMRC at the end of every financial year.
There are subtypes of limited companies:
Limited by Shares: Most common type and means that a shareholder is only responsible financially for the value of shares they own but haven’t paid for.
Private Company Limited by Guarantee: The company has the financial backing of a director or shareholder up to a specified amount.
Public Limited Company: The shares are traded publically.
Partnerships: All partners of the business share responsibility for any losses that are made and for any bills. All profits are shared between them. Each partner must submit a self-assessment and pay tax on their share of profits. They must also pay PAYE and NI. The partnership must send a partnership self-assessment to HMRC at the end of every tax year.
There are two types of partnerships:
Limited Partnership: If the business has any debt that it can’t afford to pay, it is split among the partners. However, this is limited to the amount they initially invested.
Limited Liability Partnership: Partners are limited in their liability for any debt the business has. They are only liable for the amount they invest. All responsibilities and how profits are to be shared are set out in an agreement.
These are the basic types of businesses that you can have. Each one can have employees, and if you do, you will need to register as an employer with HMRC and submit payroll information on a regular basis.
To find out more about the different types of businesses, and how to set up a business, read this article on the Gov.uk website provides quite a lot of information as to what types of business structures there are.