Deciding on the structure of your business is one of the most important decisions you make when you first start out as it affects both your legal responsibilities and the tax you pay. But although all types of business structure have advantages and disadvantages, the good news is that you can switch to a different structure at a later date if the one you pick at the outset no longer meets your requirements.
When structuring your business, the main options are:
This is the simplest way to run your own business as you don't have to pay registration fees and you reap all the profits. Red tape is kept to a minimum since you just need to record your income and expenses, register for self-assessment with HM Revenue & Customs (HMRC) and complete an annual self-assessment tax return.
But you are personally liable for any debts that your business runs up and this structure will probably not be the most tax-efficient one for businesses with a turnover of £50,000 or more.
In a partnership, two or more people (the partners or members) share the risks, costs and responsibilities of being in business with the profits normally distributed among them.
Limited liability partnerships offer greater legal protection to partners than an ordinary partnership. This is because a partner's liability is limited to the amount of money they have invested in the business. But unlike ordinary partnerships, limited liability partnerships have to send an annual return to, and file accounts with, Companies House.
Private limited companies have the letters 'ltd' after their name. They offer greater legal protection to their owners than either sole trader businesses or partnerships since they are legal entities that exist in their own right. Companies must take responsibility for their own finances and shareholders are not responsible for a company's debts unless they have provided guarantees - against a bank loan, for example.
But companies must be registered (incorporated) at Companies House and they must file annual accounts and annual returns with Companies House. In addition, the accounts may require to be audited.
Besides private companies, there are also public companies that have the letters 'plc' after their name. These companies are listed on stock exchanges such as the London Stock Exchange and the Alternative Investment Market and their shares can be bought and sold by the general public.
A franchise is not a legal structure, but a business model that can operate as a sole trader, partnership or limited company. With a franchise, you are theoretically buying into a proven business model that already has a track record of success. As a franchisee, you buy a licence to use the name, products and services of the franchisor. Franchisors typically provide a lot of support to their franchisees, but they can charge hefty fees that will eat into your profits.
If you are thinking about buying a franchise, it is a good idea to ask a specialist solicitor approved by the British Franchise Association to review your contract for onerous clauses before you sign on the dotted line.