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Starting your own business is a major achievement that involves critical decision-making. Choosing the right business structure is one of the most significant decisions you’ll make. The three main options are sole proprietorship, partnership, or corporation, and selecting the appropriate one is essential.
If you want to be in complete control of your own business and keep your financial details private, a sole proprietorship might be a good option. Just start your own business under your chosen name. However, you will be personally responsible for any business debts.
Suppose you like teamwork and want to start a business with a friend, a family member, or someone whose skills complement yours. In that case, consider forming a partnership. In this structure, two or more people run the business together. It’s always a good idea to have a formal agreement that outlines profit-sharing, roles, and responsibilities. This can help prevent any future disagreements. It is important to note that all partners are responsible for any debts the business incurs in a partnership. Those with more personal wealth may bear a greater financial burden if the company experiences difficulties.
A corporation may be suitable if you wish to establish a large business with shareholders. Although it requires more formal registration, it can enhance your business’s credibility. It is important to keep in mind that your financial details will be available to the public.
Sole proprietors and partners must pay income tax and National Insurance based on their business’s profit, not what they take from it. If the business doesn’t do well, it can offset losses against previous earnings and get a tax refund.
A corporation is separate from its shareholders, directors, and employees. It pays corporate tax on profits, which can be between 19% and 25%. It also pays National Insurance on salaries paid to directors or employees. As a director or shareholder, you can withdraw money from the corporation.
Remember that taxes aren’t the only thing to consider when choosing a business structure. Consider other risks, legal issues, and what your customers and suppliers might expect. Your business structure can change as your business grows and changes.
One last tip – if you’re considering setting up a limited company to work for others or avoid being classified as an employee, don’t forget the ‘IR35′ rules. These rules are designed to ensure people aren’t avoiding tax and National Insurance contributions by working through a company when they would be treated as an employee if they worked directly for their client. So, keep an eye on those if you’re considering a limited company. If you need help to form Limited Company and discuss your business and Tax Planning needs, please call our tax advisors.