So, you want to start your own business? Great! But before you jump in, you need to decide on a business ownership structure. There are pros and cons to each business approach. Let’s take a look at them all so you can make an informed decision.
1. Sole trader
You’re a sole trader if you’re self-employed and run your business alone. That’s not to say you can’t employ anyone – it just means you’re the sole person in charge of the business.
It’s much quicker to set up as a sole trader than as a company, because there’s no need to register anything with Companies House. All you do is:
- Tell HMRC that you’re setting up as a sole trader
- Register for self assessment tax returns
Aside from being quick to setup, there are other advantages to this business ownership model:
- You have complete control over the business and your profits.
- There’s usually no need for an accountant.
- Financial data stays private – it’s not published by Companies House.
That said, there are some disadvantages:
- You’re personally liable for all business debt.
- If you can’t work, you won’t make any money, which is why you’ll probably need insurance.
- Once you’re earning over £50,000 a year, it’s not the most tax efficient structure.
2. Private limited company
A private limited company is another common business ownership structure. That’s because with a limited company you’re not personally liable for all of any business debts. Liability is limited to either:
- Your initial share value
- A previously agreed amount
So, why opt for a limited company over being a sole trader? Well, the whole idea of “limited liability” is obviously appealing. But it also has other distinct advantages:
- You pay corporation tax rather than income tax, so it’s often more tax efficient than sole trading.
- No one else can use your company name once it’s registered.
- You can make pension contributions through the company rather than from your own pocket.
But here are some disadvantages:
- there’s more paperwork, so you’ll probably need an accountant and administrative help.
- Your financial information is in the public domain.
- You have fiduciary duties to run the company responsibly – you don’t have these responsibilities as a sole trader.
3. Public limited company
You can’t sell shares to the public if you’re running a private limited company. That’s why some people opt for public limited company status instead.
There are a number of advantages to setting up as a public limited company:
- You can attract more investors.
- It’s possible to spread the business ownership risk across a larger number of shareholders, since you can offer shares to a wider audience.
- Since it’s easy to transfer shares, there’s greater investor confidence.
There are some disadvantages, though:
- there’s greater regulatory scrutiny.
- You’re more vulnerable to takeovers than if you’re a private limited company.
- Depending on the share structure, you may well face control issues and disagreements.
If two or more people decide to run a business together, they can set up a partnership. Essentially, each partner invests their own money and shares in the profits and losses.
There are two types of partnerships:
- General: all partners are personally responsible for the business debts.
- Limited: partners are not personally liable for business debts (unsurprisingly, this is the preferred option).
Partnerships can be useful because, as with sole traders, you only need to register with the HMRC. And, the more you can invest upfront, the more capital you’ll have, so the easier it is to grow.
The main disadvantages of partnerships are that:
- They’re fairly complicated to manage.
- As with companies, there’s an increased risk of conflict and disagreement.
Okay, so running a franchise isn’t technically the same as starting your own business. But we’re including it on this list because it’s a valid business ownership opportunity.
Essentially, you pay an established company a fee to use their business elements like branding and marketing to run your own franchise. There are franchise options to suit every budget, but you’ll usually need at least £10,000 to get started.
Here are two key advantages over starting a business from scratch:
- It’s much easier to draw in customers, since there’s already an established base.
- There’s less risk involved, so it’s easier for inexperienced business owners to learn the ropes.
The main downsides are:
- There’s little scope for you to shape the company direction.
- If the company lets someone else set up a franchise close by, it could affect your performance.
Fun fact: hugely successful companies like McDonald’s use this model.
Making the right business ownership decision
Business ownership is about more than just running a company. It’s about picking the right business structure for your company’s long-term success. The structure you choose can influence everything from the tax you pay to the freedom you have to run your business, so think carefully before you take the leap.
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