Business structures: the pros and cons

Company

Sole trader or partnership

A company must be formally incorporated with a written constitution in the form of a Memorandum and Articles of Incorporation. There is, therefore, an initial setup cost.

There are no formation costs, but a written partnership agreement is advised.

Companies are governed by the Companies Act. A company must:

  • Keep accounting records.
  • Produce audited accounts (if turnover is greater than £6.5 million).
  • File accounts and an Annual Return with the Registrar of Companies. This information is available to the public.
  • Keep Statutory Books.

Sole traders and partnerships are not required by law to have annual accounts nor to file accounts for inspection.
However, annual accounts are necessary for HM Revenue & Customs tax returns.

Companies many have greater borrowing potential. They can use current assets as security by creating a floating charge.

Sole traders and partners are unrestricted in the amount and purpose of borrowings, but cannot create floating charges.

Shares in a company are generally transferable – therefore ownership may change but the business continues.

 

Incorporation does not guarantee reliability or respectability, but gives the impression of a soundly-based organisation. Personally, there may be prestige attached to directorship.

The unincorporated business does not carry the same prestige.

Tax is payable on directors’ remuneration paid via PAYE on the 19th of the following month. If applicable, higher rate tax is paid by shareholders on dividends under the self-assessment rules.

Corporation tax is payable nine months after the year-end.

For a sole trader or partnership, tax is generally paid by instalments on 31st January in the tax year and 31st July following the tax year.

For an ongoing business, tax for 2012-13 is payable:

  • First payment on account 31st January 2013
  • Second payment on account 31st July 2013
  • Any final balance due on 31st January 2014

This is slightly different for a start-up business.

First year losses in a company can only be carried forward to set against future profits.

Losses generated by a sole trader or a partner can be set against other income of the year or carried back to prior years.

For profits of up to £300,000, tax is charged at 20 percent (2012-13).

Profits are taxed at 40 percent on taxable income in excess of £34,370 and at 50 percent over £150,000 (2012-13).

Both employers’ and employees’ national insurance (NI) is payable on directors’ salaries and bonuses. The NI charge is greater than that paid by a sole trader or partner, but there is no NI charge on dividends.

A partner or sole trader will pay Class 2 NI of £2.65 per week and Class 4 NI dependent on the level of profits.

For more information on choosing the right structure for your business, please contact us.

Interested? Let us get in touch with you!

 

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