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The way you set up your business is crucial, because it affects what sort of tax you pay, how you keep records, and the extent of your liability if the business gets into serious debt.
There are four main business structures: the sole trader, the partnership, the limited liability partnership (LLP), and the limited company.
To be part of any of these as an individual, rather than a company, you must first be registered as self-employed with HM Revenue and Customs (HMRC). Beyond this, each of the four categories has benefits and drawbacks.
Be your own boss
Being a sole trader is by far the simplest way to run a business. It does not involve paying any registration fees, and keeping records and accounts is straightforward. What's more, you get to keep all the profits you make.
Other benefits are that you get to make all the management decisions, enabling you to move quickly in a competitive marketplace.
In terms of keeping the books, you have to make an annual self-assessment tax return to HMRC, which can be straightforward or may require the help of an accountant. You must also keep records showing your business income and expenses.
The downside of being a sole trader is that you are personally liable for any debts that your business runs up. This makes being a sole trader a risky option for businesses that need a lot of investment, and your home or other assets may be at risk if your business runs into trouble.
But for many entrepreneurial businesses or home workers, this is the way to go because it affords flexibility and autonomy.
Two's company
If you want to work with one or two others, partnership is the way to go. In a partnership, a small number of people share the risks, costs and responsibilities of being in business.
Each partner is self-employed and takes a share of the profits, and usually the decision-making, though you can have 'sleeping partners'.
However, each partner is also personally responsible for any debts that the business runs up, so their house and other assets may be at risk if the business fails.
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 have any protection if the business fails.
Partners are well advised to draw up a good written agreement, and seek the help of an accountant or a solicitor to do this.
The LLP is a kind of partnership where liability is limited to the amount of money partners have invested in the business, and any personal guarantees they've given to raise finance. This means members have some protection if the business runs into trouble.
Working as a team
The next level up is the limited company - private (plc) or public (ltd) - which is the best choice for business owners who want to keep the company's finances distinct from their personal finances.
'Plcs' and 'ltds' have private and public shareholders respectively, and must be registered (i.e. incorporated) at Companies House.
They need to have at least one director (two if it's a plc) and a company secretary, who may also be shareholders.
In terms of the finances everything must be done by the book. The company's accounts are filed with Companies House, with accounts usually audited each year. Also worth noting is that limited companies pay corporation tax and must do an annual return.
Decision time
These are the four main categories of business. Unless you're an accountant, it's worth getting advice on forming a plc, ltd and even a partnership. But if you opt for being a sole trader and have the time, it's possible to go the DIY route to set up your new business.
Useful links for further information:
Related information:
Finding a niche in the market - make sure there is a need for your business and there's not too much competition out there already.
Putting together a business plan - raising investment and getting jobs done may be difficult if you don't have a carefully structured plan.
Free legal advice - as a Direct Line for Business policyholder you will have access to free telephone helplines - find out more about these services.
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