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Business Structure- What Is The Best One For Me?Written on January 10, 2020 by Kirk Rice LLP

Business Structure- What Is The Best One For Me?
Taxing Times Questions

The Question:

I recently sat down with a new client who wanted to set up a new limited company, as he had been told that ‘a limited company is the best structure to use’. Of course I quickly replied ‘well, that depends…’ – a well-used phrase for accountants and tax advisers. There really is no best business structure overall, only the best for a particular set of circumstances, which is why one should always sit down with an accountant to discuss which structure to use – getting it wrong and switching at a later date can sometimes be expensive to rectify, expensive in tax and annoyingly time-consuming.

Kirk Rice LLP answers:

If you are operating by yourself, the business structure decision is simply one between self-employment and incorporation – a decision addressed in part by an earlier blog post on 21 June. In summary, there are various tax aspects to that decision, consideration of legal obligations for company directors, and the issue of privacy afforded by not having to publicly file accounts for unincorporated businesses. Different people will place different levels of importance on these matters, which will impact the decision.

But, what if there is more than one of you going into business together?

Well, the same broad principles apply. It’s just that you also have to take into account who will get paid what, how will it get paid, who is responsible for what, what are the long-term plans for each of the participants etc. The answers to those questions, and many others, will determine which structure to use. There are like-for-like equivalents to individual vehicles.

The self-employment version for multiple members is the partnership. Again, as an unincorporated entity, the individuals and the business are one and the same, so claims against the business will be claims against the individuals on a jointly-several basis. Accounts and results remain private, and tax is paid on profits as they are earned at individual tax rates. Profits can be shared on whatever basis the partners feel is appropriate, whether that be equally, or according to time invested in the business, or by fees earned etc. – this can be easily set out in a partnership agreement (see below).

The incorporation option remains the same, except the profits and assets of the business, are divisible between the shareholders in proportion to the shares they hold in the company. In this case, accounts must be filed publicly, and the company directors (who do not have to be the same as the shareholders) have legal responsibilities to uphold. However, overall tax rates may be lower and deferred to some extent by individuals not taking the profits out of the business until required (by salary or dividend). The business owners are protected by the Limited liability in the event of claims against the business, to the extent of their unpaid share capital (which can be set as negligible).

There is a third business structure option of an LLP or Limited Liability Partnership. As the name suggests this is a partnership that carries the benefit of limited liability for its members – essentially a best-of-both of the above two options. It keeps the flexibility of a partnership in terms of remunerating its members (and taking on/removing them), whilst giving them limited liability protection. Tax is paid in the same way as for partnerships. This set up is commonly used by professional businesses such as solicitors and accountants, and is useful for larger businesses that need flexibility – see our factsheet here for more details.

For ALL of these vehicles, clearly when it is no longer just you to worry about, one should ensure that there will not be future misunderstandings and that there is an agreed way of operating the business. Whilst most people going into business together invariably envisage a bright future where they will never fall out, I cannot stress enough how important it is to have a written shareholder/partnership agreement. Over the years I have witnessed more fallings-out than I care to remember, and also just simple unfortunate instances where the business can no longer carry on. The agreement, which can often feel like a grudge purchase when not utilised, invariably becomes invaluable when it IS called upon. We always suggest using a solicitor to draw up a suitable agreement, although we can help mitigate costs by assisting with a rough draft of what needs to be included in the agreement, or a ‘heads of terms’. We can also recommend solicitors to assist.

Needless to say one can probably see from the above that, again, there is not an overall best answer to the original question, but there are certainly enough options that a quick decision could easily be the wrong decision. If you find yourself in a position of thinking about starting up a new business – alone or with others – please speak to us first to ensure the best structure is used for your circumstances.

Any reader interested in discussing the business structure can telephone Graham Jennings on 01344 875000 in our Ascot office or James Moody on 020 8789 8588 in our Putney office. You can also email info@kirkrice.co.uk.

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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.