Starting a new business but not sure what kind of organisation umbrella you choose for your business? There are several options, like sole trader, partnerships, limited liability partnerships and limited companies either private or public. Each type of organisation has its own characteristics, i.e. how many people will be involved in the organisation, how the organisation is funded, the tax and accounting implications and who is responsible for the organisation and to what degree.
The choice you make will be determined by what your requirements are and which type of organisation structure fits ideal to your needs both present and future. The characteristics of two of the most common organisations types are listed below.
Sole Trader – Is a one owner setup and is the easiest way to begin trading, typically includes carpenters, plumbers etc. You don’t have to inform company’s house, you only need to let the taxman know of your intentions.
You may employ one or more people, but you’ll be responsible for their PAYE, tax and national insurance contributions to the revenue. The individual and the sole trader are treated as the same legal entity and hence the liability is unlimited i.e. you’ll be personally liable for debts you incur in the process of running your business. Ensure you’ve insurance to cover liabilities other wise you could loose a lot if things went wrong. Your business and personal income will be taken hand in hand and you will pay income tax and national insurance on all profits. You may be able to offset any losses against tax on other income. Many people start out as sole traders then upgrade into private limited companies.
Limited Companies – One or more shareholders who contribute the capital to finance the company. Directors run the company on behalf of the shareholders. The directors might also be shareholders and might also be employees of the company receiving salary. Limited companies are subject to corporation tax on profits, which can be distributed to shareholders as dividends. The company has to be registered with company’s home and there is more red tape involved in terms of submitting accounts and other documents. The company is treated as a legal entity and hence liability, debt incurred in the process of the company trading is limited as far as the company assets in respect to the directors and shareholders, who will have no personal liability. The company might employ one or more people and will be responsible for their PAYE, tax and national insurance contributions to the revenue. Private limited companies are controlled by smaller numbers of shareholders and are typically smaller in size. Public limited companies are normally more massive companies listed on the stock market with the general public also owning shares in the company.