Choosing the right structure for your business

22 January 2018

You may have decided that this year you will start a new business. It could be because you are currently not working or it could be as a more flexible alternative to regular employment.

Whatever the decision for starting a new business, there are a number of issues to consider before you make a decision about whether it is the right choice for you. Tax is only one of the aspects, but one of the most important, to understand. Not considering tax can mean significant and unexpected tax bills which could put the future of your business at risk.

The most popular structures for a business are:

  • Sole trader if setting up on your own
  • Partnership if setting up with other people
  • Company

If you are a sole trader or partnership, your business is not a separate person from you (in England and Wales). As a sole trader, you are taxed (depending on profits between 20% and 45% plus national insurance) as a self-employed person on the profits, regardless of whether you take the money out or reinvest it in the business. As a partner, you are taxed in a similar way to a self-employed person, but just on your share of the total profits of the partnership.

A company is a separate legal person. You will normally be a director, employee and also a shareholder in your own company. You can take money out as a salary or by paying dividends. A company pays Corporation Tax on the profits (currently at 19%). If you leave the money in the company to reinvest in the business there will be no further tax. If you take the funds out of the company the rate of tax will depend on whether you take the funds out as a dividend or a salary. If you need to take the funds out, this structure could create a double layer of tax. Firstly in the company and secondly on the individual.

The structure you chose may depend on whether you want to reinvest in the business or if you need the funds for personal expenditure.

If you require investment into your business from a third party a company structure may be more attractive, as some company structures have tax incentives for investors such as Enterprise Investment Scheme’s (“EIS”) and Seed Enterprise Investment Scheme (“SEIS”). Both provide tax incentives in the form of a variety of Income Tax and Capital Gains Tax reliefs to investors who invest in certain unquoted trading companies.

At Ellacotts, we have a wealth of experience advising people setting out on a new venture. If you would like to know more about either setting up a new business structure, changing an existing one or the tax breaks for investing in a business, we would be delighted to hear from you. Contact Ann Bibby for more information.