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Choosing a business structure
When it comes to starting your own business, you have to think about which legal form your business should take. The appropriate structure will depend on factors such as taxation, legal entity, ownership and liability. Getting it right is key both on a personal and business level.
Sole trader is a popular choice and has the advantage of simplicity and lower costs however one important point to consider is that any debts incurred by the business become personal debts thereby putting personal assets at risk. Any profits generated are automatically yours. Tax is calculated via the self assessment process.
A Partnership, as the name suggests, involves two or more people collaborating. The most important thing when using this structure is to have a Partnership Agreement drawn up. Partners are jointly and severally liable for partnership debts. This means that a creditor can make a claim on your personal assets if debts are built up – even if those debts have been run up by your partners. Partners are taxed in the same way as sole traders, but only on their own share of the profits.
A Limited company has a legal status separate from that of its owners. It can trade, own assets and incur liabilities in its own right. Your ownership of the company is established by owning shares. If you work for the company, you are both the owner (shareholder) and an employee of the company. Extracting money from the company is done by either paying a dividend or salary. Companies pay corporation tax on their profits after paying your salary but before your dividend distribution. Effective tax planning requires profits, salary and dividends to be considered together.
A Limited Liability Partnership offers the benefits of a partnership along with limited liability.
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