We are often asked what the best business structure is when someone wants to start a new business.
“What is the best structure for my business?”
We are often asked this question when someone wants to start a new business. The predictable, time-honoured answer is, of course: “it depends”.
Choosing the best business structure
The main points we consider:
- What is the nature of the business?
- Who are your main customers?
- How do you plan to make the business grow?
- Where will you locate your business?
- How will I finance the business?
- What is the nature of the Business?
In some areas of business activities it is essential for a new business to be incorporated into a limited company. This often applies, for example to computer consultancy businesses, or where you are going to be selling services to large corporations. The advantages of setting up a limited company include:
Limited liability – The business owners can limit their liability to third parties to the value of their shareholding in the company. (Unless they have been required to give personal guarantees on a particular transaction.)
Flexibility – There may be some flexibility in how you choose to reward yourself; whether by salary or dividends (even with the proposed dividend changes next year).
Who are your main customers?
Some companies prefer to deal only with limited companies, so that they can make a clear distinction between buying services from a company rather than those of an individual, which could be seen as quasi-employment.
A limited company must file their accounts at Companies House. Anyone who is interested in doing business with your company can check the records at Companies House to get a feel for how the company is doing, what charges there may be over the assets of the company, and whether the records are up to date.
How do you plan to make the business grow?
It’s possible to set up your limited company with different classes of shares, each class being entitled to different rights. You could, for example, incentivise and retain good employees by letting them have shares that give them rights to a dividend, but not necessarily voting rights in the company, so that you or your family maintain the overall control in the company.
Where will you locate your business?
Nowadays, people quite often run their business either from home or from a virtual office. However, if you require separate premises, your landlord may prefer to let the premises to a limited company rather than an individual, for reasons of visibility as mentioned above.
How will you finance the business?
If you are likely to require finance from your bank, then it is likely that the bank will require personal guarantees from you, so that you cannot hide behind the limited liability afforded by a corporate structure.
The downside of having a limited company is the added administrative costs of submitting annual accounts and returns to Companies House, and corporation tax returns to HMRC. Directors are also responsible for ensuring that they comply with company law and they act within the terms of the Memorandum and Articles of Association of the company.
There is a cost of setting up a limited company and a further cost to close it down.
You could start their business as a sole trader and incorporate later, as your business grows. This is a perfectly reasonable route to take, but be careful of tax implications at the point of incorporation. If there is a value to the business at that point, it will create a tax charge on the individual when it is transferred to the company.
These are some general points that we take into consideration when recommending the best business structure. Of course, every business is different so talk to us to make sure your business structure is the most tax efficient structure to allow your business to grow.
For more information
For more information, please contact either:
Scott Harrower, Andrew Bagley or Lulu Emms, or call us on: