Starting up your Business – Part Two

Setting up a business can be stressful. You may know everything about your business, but whether to trade as a sole trader, a company or a partnership, taking on premises or becoming an employer it can seem daunting. Hopefully these articles will make it less so!

In this article – part two – we’ll tackle limited liability businesses. In part one we covered sole traders and partnerships.

Limited Liability Partnership

An LLP is a relatively new structure when it comes to business formation. It combines the flexibility of a partnership with some of the protection offered by a company. It is more formal to set up than a normal partnership and requires registration at Companies House. It must also have at least two partners. This allows it to have a separate legal status from the partners and means it can enter into contracts and own property in its own right.  Partners are referred to as ‘members’ of the LLP, they do not hold shares and have no obligation to contribute to the capital of the LLP.

Unfortunately, with the limitation of liability comes increased regulation. You are required to file an annual return and annual accounts with Companies House and notify them of every change in the LLP’s membership, as well as any legal charges granted over its assets.  For a small fee this information is available to the public, a reason why some business owners prefer to retain the anonymity of a normal partnership.

The profits of an LLP are taxed as a partnership so each partner must submit an income tax return to HMRC to account for their share of the profits. The partners are able to agree how the profits will be divided, how decisions will be made, how and when new members are appointed and the circumstances in which a partner will retire. This can be set out in a private partnership agreement in the same way as a normal partnership. Many LLPs are professional businesses or semi-charitable businesses.

Limited Company (Register at Companies House)

A Company provides the highest level of protection to shareholders, investors and directors. It is registered with Companies House and must comply with the same filing requirements as apply to LLPs. Depending on the size of the company, full or abbreviated accounts will have to be filed at Companies House annually and are then publicly available. This same transparency applies to the details of the directors and shareholders of the company.  In return for this, the liability of shareholders is limited to the face value of the shares they own. A company can be formed by a single individual. There are due to be recent changes to the Companies Act 2006. Small companies will be required to file both their profit and loss account and directors’ report and will no longer be able to prepare and file abridged accounts. Micro-entities will also be required to file their profit and loss account but will continue to have the option not to prepare or file a directors’ report.

When setting up a limited company you may wish to appoint an accountant to do this as they will be also able to register you for RTI Real Time Information with HMRC. A requirement to report your monthly payroll to HMRC.

During the registration process you may also wish to consider your registered address which will be open to the public. It may be better to avoid using using residential home address and ask if your registered address could be at your accountant office. This is ideal as it enables all HMRC/Companies House letters will be sent directly to their address.

If they wish, this allows shareholders to simply act as investors and appoint directors to run the day-to-day affairs of the business and take the risk of personal liability.  Many choose to act as directors of the company and take on the responsibility of running it. Unless they act outside their powers, are negligent or fraudulent then they will not have any personal liability for the company’s actions. A director can take a salary from the company and if they are also a shareholder, they may entitled to a proportion of any dividends issued subject to the trading entity, and this will be a professional conversation with the accountant based on the level of dividends that can be taken, to ensure there is a sufficient level of working capital remaining in the business for the business to continue to operate profitably.

If the business is likely to generate significant income, then a company may be the best vehicle to minimise tax liability. Corporation tax. The rate at which corporation tax is charged is scheduled to increase from 1 April 2023. The rate will increase to 25% for companies whose taxable profits exceed £250,000. For companies with profits of less than £50,000, the current 19% rate will still apply. (This may be subject to change) significantly lower than the personal income tax rate on that amount! The optional issue of dividends means that some profit can be left in the company and distributed to the shareholders over a longer period of time. The expense of setting up and running a company means that it is not always the best vehicle for a start-up business. There is, however, no reason that a business cannot change its structure as it grows, moving from a sole trader to a partnership to a company, and normally done at the year end.

If you’re interested in starting up a new business in the North Somerset Council area, please contact us to see how the hive can help.