Self Employed Or Limited Company – Choosing The Right Legal Structure

When it comes to choosing the right legal structure for your business, there are many deciding factors that you need to consider. Your ideas are excellent, your market research is underway and you have written a detailed business plan, but you need to explore the differences between being self-employed or a limited company.

All of the options come with their advantages and disadvantages, but it is up to you to make the right decision for your business. So, in this article, we will look at the differences of being a self-employed individual or a limited company and what legal structure may be right for you.

Self Employed

As a self-employed business owner or sole trader, you will be responsible for running your own business and meeting the various legal requirements that come along with it. You will be entitled to keep your profits after tax, but you are also personally responsible for any debts that your business incurs. As a self-employed business owner, you will be able to employ members of staff if you wish to.

In summary, the owner of the business will be entitled to keep all profits, but be fully liable for all losses. On one hand, the business is very easy and fairly inexpensive to set up and full control is also retained. However, the full liability for debt is the downfall of this legal structure.

Partnership

With this option, you and your partner will personally share responsibility for your business. The profits are shared equally and each partner is fully responsible for paying tax on their share. In this case, a limited company could also technically be a partner; it doesn’t have to be an actual person.

When setting up a business as a full-fledged partnership, you need to agree on a name, choose a ‘nominated partner’ and register with your local government board. The nominated partner is in charge of monitoring the tax returns and keeping a record.

In a partnership agreement, you can outline all of the liabilities, ownership, how the profits are divided out and what happens when a partner decides to leave. In a standard partnership, all of the partners are fully responsible for any business debts that may occur.

Some of the advantages of a partnership include being quite easy to form and manage, as long as you trust the person or company you are going into business with. There is also more opportunity to make money as there are two people contributing to the workload. On the other hand, you might face a partner dispute and each partner still has full liability over the business’s debts.

Limited Liability Company (Ltd)

It is important to register yourself as a limited company, otherwise, you won’t be able to start trading yet. This will involve choosing the company office and firming up a name for your business. As soon as Companies House has been informed, you will be ready to get going, but you need to consider some of the pros and cons first.

As a Limited Liability Company, you might be setting yourself up for more admin, which can be quite overwhelming if you’re unfamiliar with the process. You might find yourself more stressed when the end of the tax year is looming, although this can only be overcome if you hire an accountant to help lighten your load.

On the other hand, setting yourself up as a Limited Liability Company can give you a better reputation and more credibility, which may be useful when you’re asking the bank for a loan. A limited company is also a separate legal entity from the company directors, which means the business itself takes on liability if the business crashes, rather than the directors personally. The majority of companies are owned by shareholders and the owner’s liability is limited by shares. If anything were to go wrong, the face value of the shares that an individual holds is the most they can be asked to pay.

Limited Liability Partnerships (LLP)

In this type of legal structure, the number of partners is not limited, but at least two need to be labelled as ‘designated members,’ who are responsible for keeping accurate records of the accounts.

This model protects all of the members’ assets, which limits their liability to whatever they have invested in the business. They also only risk any guarantees they make when business loans may have been granted.

The members will share the profit, which is taxable. LLPs must also register at Companies House, in which there should be an official agreement which states the share of the profit for each member.

This legal structure offers more flexibility, which can be outlined in the official member’s agreement, and it has advantages of both limited companies and partnerships combined. On the downside, the partners have to disclose their personal income and an LLP must begin to trade within a year of registering otherwise they will be declined from the system.

Public Limited Company (PLC)

It is quite uncommon for a business owner to choose the structure of a PLC unless your business plan overtly explains the need to raise money on the stock exchange within a set amount of time.

A PLC is a limited liability company whose shares may be freely sold and traded to the public with a minimum share capital of £50,000. The company can be either unlisted or listed on the stock exchanges.

Starting off as a Public Limited Company is quite unlikely, so search for more information if you’re considering this and speak to an accountant.

Need More Advice?

There are several legal structures that your business could choose from, so take some time to consider the best option for you. And, if you still feel you need help, get in touch with our team today for independent advice.

Call us on 01753 840 188 or email [email protected] where we will be happy to chat through the different options in greater detail.