Sole trader, LLP, subsidiary - what’s the best company structure for your UK business?

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• Sole trader
• Partnership
• Limited company (LTD)
• Limited liability partnerships (LLP)
• Umbrella company
• Branch
• Subsidiary

Sole trader

A sole trader is an individual who is self-employed and is therefore personally liable for their business’ debts. Meaning that their personal assets may be at risk if creditors cannot be paid. Being a sole trader doesn’t mean that you need to work alone, as you’re allowed to have employees, but ultimately the control and management lies with the owner.

The benefits to being a sole trader:

• It’s quick to set up as there is no need to register a company with Companies House.
• There’s no need to consult with other directors or shareholders when changes in the business need to be made.
• Your accounting as a sole trader is simpler than if you were trading as a limited company because there’s no need to file a Corporation Tax Return. You’ll still need to maintain records of invoices and expenses and submit a personal Self Assessment tax return, which will include details of your profits.
• A sole trader’s personal information, published accounts and financial information are all kept private. This makes it harder for your competitors to glean information about your business.
  It’s easier to start out as a sole trader and change to a limited company than doing the reverse because you have to go through the hassle of closing a company. 

Who usually registers as a sole trader?

Operating as a sole trader is popular among tradesmen or people who provide personal services to individuals and families. Plumbers, decorators, plasterers, hairdressers and other individuals who provide specialist services often operate as sole traders. A limited company, even if run by one person, can appear to be a bit impersonal for your target market. 

Partnership

A general partnership shares many similarities with a sole trader, except that this is when two or more people come together to form a business. Each partner contributes capital, skills and time – and all partners are personally liable for any business debts and obligations.

The benefits to general partnerships

• It’s easy to set up. Like with a sole trader, you won’t have to register your business with Companies House and registering a business partnership for taxation with HMRC is quite simple.
• There is no need to complete a Corporation Tax Return. However, as with a sole trader, you will have to submit a personal Self Assessment tax return as well as a partnership tax return that needs to be filed.
• It can be daunting to start a business on your own and having a business partner allows you to share this burden. Each partner will also bring their own knowledge, skill set, experience and contacts to the business, potentially giving it a better chance of success than if any of the partners were trading individually.
• You will have easy access to your profits, as the money is paid directly through the partners’ personal tax returns rather than initially being retained within the partnership. 

Should you join a partnership?

Professional services like doctors, accountants and solicitors often form partnerships. However, it’s accessible to various types of businesses, for example, two tradesmen looking to work together might choose to run their business as a partnership.

Limited company (LTD)

A private limited company is a corporation, which means it is seen as an individual in the eyes of the law. A corporation pays its own tax, can own possessions, borrow money, sign contracts and even be sued as if it were a person.

The benefits to a private limited company

• A company can be incorporated online and once all the correct information is provided; the company will be ready to operate in a couple of days. We offer a range of services for limited companies including the initial set-up and tax services. 
• The company has a separate legal identity to its members, meaning that a limited company can survive the death of its founders and change ownership. It will only cease to exist after it is formally dissolved.
• Shareholders have limited liability should the company suffer any losses or debt; they’ll only be responsible for the amount they invested in the company.
• Trading as an LTD gives your business a sense of credibility that could build trust with your customers.
• Unlike sole traders and partnerships, who pay income tax, limited companies pay Corporation Tax rates. This can work out less if you find yourself in a higher income tax band because of your profits. LTDs can be more tax efficient than the other business models.
• Can be started by one person but you will be able to take on new directors or shareholders in the future. You won’t be able to do this as a sole trader.

Who should consider setting up a limited company?

• Self-employed individuals who want more credibility. While there might be more admin when setting up an LTD rather than operating as a sole trader, the benefits might outweigh this initial setup.
• If you have plans to grow your business, or pass it on somewhere down the line, it would be better to form a limited company.
• If you work for multiple clients and fall outside of IR35.

Because both individuals and groups can trade as an LTD, this type of company provides many advantages to you that you wouldn’t get as a sole trader or in a general partnership. 

Limited liability partnerships (LLP)

An LLP is a sort of hybrid between a general partnership and a limited company (LTD), but tends to share similarities with an LTD, in that they are both viewed as separate legal entities from their members, and none of the members can be held personally responsible for business debts. There are still some very big differences between the two.

An LLP doesn’t have shares, shareholders or directors, but instead has members. These members assume the dual responsibility of ownership and management of the business. The main restriction of an LLP is that it has to be a business that is intent on making a profit, rather than non-profit or charitable organisations.

The benefits of forming a limited liability partnership

• Unlike a general partnership, in an LLP each partner is not liable for any misconduct or negligence by any other partner and cannot be held personally liable. This makes it particularly attractive to doctors or lawyers where malpractice suits are a risk. 
• LLPs can enter into commercial contracts and own property. 
• The LLP is liable for its own debts and its members are only liable to the extent of the capital invested in the LLP. They can’t be held personally liable for any misconduct or any business debts.  
• Because there are no shareholders or directors to report to, an LLP can determine the decision making method it wishes to follow.
• Unlike a limited company that has to pay Corporation Tax on its income, an LLP is taxed like a traditional partnership, where each member pays income tax, National Insurance and Capital Gains Tax on their own share of the profits. 

Should I form a limited liability partnership?

LLPs are often used by professional firms like accountants, solicitors, architects and medical practitioners who either cannot operate as a limited company because of restrictions imposed by their professional associations or want to benefit from the specific advantages of LLP status. Many traditional partnerships often convert to LLPs because of this.

Umbrella company 

An umbrella company takes the hassle out of admin and making sure that, as a contractor or freelancer, you are tax compliant. Working through an umbrella company or service means that essentially you are an “employee” of that company while enjoying the freedom of working for yourself, with all the benefits that employment offers.

The benefits of working through an umbrella company

• You will have the freedom of being self-employed while still maintaining the benefits of being an employee.
• Your tax compliance is taken care of by the umbrella company.
• You will be able to claim sick, holiday and maternity/paternity leave.

Who should consider joining an umbrella company?

Contractors or freelancers who don’t want to deal with the hassle of payroll admin and making sure they’re tax compliant, and who want the security of having an “employer”. You’ll have complete peace of mind that everything is taken care of.

If you are a higher earning contractor, this type of business isn’t as tax efficient as working through a limited company, but it is hassle-free and gives you flexibility with less commitment as a company director.

If you are worried about remaining tax compliant, we offer umbrella payroll services to ensure you stay on the right side of the HMRC. 

Branch

A branch is an extension of a parent company operating under the laws of another jurisdiction. It is not a separate legal entity. The parent company is liable for all the branch’s operations and its annual financial statements need to be filed at Company House.

The benefits of operating as a branch

• It’s quick and easy to set up. 
• It can be converted into a limited company or subsidiary at any further point.
• It can be closed without formal notice.

Who should open a branch?

Already established companies who are looking to extend their business.

See more: UK branch vs subsidiary

Subsidiary

A subsidiary is an entirely separate legal entity from the parent company, meaning that the parent company is not liable in any way for any actions or decisions of the subsidiary. This also gives the parent company protection in terms of liability if the subsidiary should make a loss.

The benefits of establishing a business as a subsidiary

• A subsidiary is considered its own legal entity, so it can own property, can sue or be sued.
• A subsidiary is far more credible with UK suppliers and other companies as it is considered a UK company, meaning it is governed by UK laws. 
• The parent company’s profits are shielded from being taxed by the UK government.
• The parent company does not have to file their year-end financial statements at Companies House

Who should consider a subsidiary for their business?

This is the best way for overseas companies to set up a business in the UK as it lends them more credibility as well as providing the parent company with a layer of protection against liability.

How we can help with UK company formation

Once you have decided what type of company you would like to set up (a limited company, UK branch, subsidiary or otherwise) we can help you with:

• Setting up and company registration 
• Establishing a good working relationship with your bank
• Registering your operation for UK Corporation Tax, VAT and PAYE
• Appointing a company secretary - we can appoint ourselves and carry out the statutory company secretarial issues associated with this role
• Setting up an address which can be used as your registered office

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We offer specialist, personalised accounting and tax services with a flexible fee structure to help businesses of any size. Give us a call on +44 (0) 20 7759 7553 or email accounting@sableinternational.com.