When starting a business in the UK, understanding the different types of business structures is crucial. The right structure can have a significant impact on your taxes and overall financial obligations. In this article, we will explore the four main types of business structures in the UK: sole trader, partnership, limited liability partnership (LLP), and limited company. We will delve into how each structure works, its advantages and disadvantages, and most importantly, how it affects your taxes.

By gaining insight into these structures, you can make an informed decision that aligns with your business goals and ensures compliance with tax regulations. So, let’s dive in and explore the world of UK business structures and their tax implications.

In the UK, it’s important to be familiar with the four main types of business structures:

Sole Trader

As a sole trader, you are self-employed and solely responsible for running your business. You can retain the profits after paying taxes, but you are personally liable for any debts incurred by your business. Sole traders have the option to employ staff.

When it comes to taxes, sole traders pay income tax on their business profits. The tax amount depends on the income rate they fall into, which can be the basic rate (20%), higher rate (40%), or additional rate (45%). National Insurance contributions are also required based on the profit made.

Partnership

A partnership involves two or more individuals sharing the responsibility for managing and profiting from the business. Each partner pays taxes on their share of the profits. It’s worth noting that a partner can be a legal entity, such as a limited company.

In terms of taxes, each partner must register as self-employed, file their own self-assessment tax return, and pay income tax and National Insurance contributions accordingly. VAT registration is necessary if the partnership’s earnings exceed £85,000.

Limited Liability Partnership (LLP)

An LLP allows for an unlimited number of partners, and at least two of them must be designated partners responsible for filing annual accounts. LLPs offer liability protection for the partners’ personal assets and investments made in the business.

For tax purposes, each partner’s share of the profits is considered taxable income. Similar to partnerships, LLP members need to register as self-employed, complete self-assessment tax returns, and pay income tax, National Insurance contributions, and VAT if applicable. LLPs do not pay corporation tax.

Limited Company

A private limited company is incorporated and limited by shares. It has shareholders, whose liability to creditors is limited to the amount they invested. The personal assets of shareholders are protected in case of company insolvency, but the invested money may be lost.

In terms of taxes, individuals who own a limited company pay income tax on dividends over £2,000. The rate depends on their income tax band. Additionally, the company itself is subject to corporation tax on its profits. The rates vary based on the level of profits. Class 1 employee and employer contributions apply if a salary is paid, and VAT is required on profits exceeding £85,000.

Choosing the Right Business Structure

Selecting a business structure depends on individual circumstances and financial goals. It’s crucial to consider your specific situation and objectives when determining the most suitable business structure for your needs. Taking into account your financial situation and long-term plans can help you make an informed decision.

Wanting to start a business but confused which type of structure to form?

We at 360 Accounting can help! Contact us to know more!