Is your business structure fit for purpose?
When I started my business, simplicity was key. Honestly, I was not sure what the future looked like and, with a new-born baby, I registered as self-employed and largely took a leap into the dark. I sorted out the relevant registrations and produced some pretty ropey looking headed paper (on the cheap) and there I was with an “established” business.
A few years down the line and I realised that I had perhaps been hasty. Taking a step back, I realised that my business would be better structured as a limited company. At the time, the tax advantages of incorporation were even better than they are now. I was also influenced by the professionalism that having a company portrayed to my client base. I undertook to set up a new vehicle and Prime Numbers Accountancy Services Limited was born. As easy as it was to set up a new company with Companies House, it came with the headache of changing web domains, reprinting all my stationery, changing bank accounts, notifying suppliers and clients – perhaps it would have been easier to pick the right structure from Day 1?
So, if you are at the stage of working out what form your business should take, what are the factors that you should consider? Have a think about the following:
· Do you want to make a profit?
· How risky is your business?
· Do you need to appear bigger than you are?
· Do you like admin?
· Are you happy to bear additional professional fees?
In days gone by, tax was a major factor pushing those with earnings over a certain amount towards incorporating. However, following the changes to the dividend tax rules in 2016, the differential in take home pay between a self-employed person and an employee/ shareholder is much smaller. It’s worth looking at the calculations with an accountant, as incorporation may still be tax-efficient, but it is no longer such a persuasive factor.
So, what are your options?
The most common options that I see are:
· Sole trader/ Partnership (if there’s more than one of you)
· Community Interest Company
but this list is not exclusive. There are other options available too including limited liability partnerships, unincorporated associations, trusts or umbrella companies.
What might sway your decision?
A sole trader/ partnership arrangement is the simplest option. There are no filing obligations with Companies House and the level of external scrutiny and regulation is reduced. Profits are taxed via the owner’s self-assessment return. The biggest downside is that the business owner bears personal liability for the business and its liabilities. This structure may also restrict future growth as opportunities for external financing are less than that of a company (which can issue shares).
A limited company is the most common vehicle that I see. Companies are a separate legal entity (think of it as a person in its own right). The investors own the business, but the liabilities of the business stay with the corporate vehicle. So, they are less risky to the entrepreneur personally. But there is a price to pay for limited liability. Be warned that there is more administrative burden with a company as it is subject to more scrutiny and accountability. There are constitutional documents that the company is required to have and there are ongoing secretarial and financial filing obligations with Companies House.
If you are undertaking a “social enterprise” you could look at a Community Interest Company (CIC) which is a special form of company for those that want to use their profits and assets for community benefit. CICs are easy to set up and have the benefits of limited liability but MUST clearly serve a community interest rather than a strategy of maximising returns for the investors. As such, they are regulated by both Companies House and the Charity Regulator/ Office of the Scottish Charity Regulator. If your aims are charitable you could also consider a Charitable Incorporated Organisation (CIO) or Scottish Charitable Incorporated Organisation (SCIO) which are relatively new legal form offering the benefits of incorporation, but the organisation is regulated under charity law rather than company law. The main benefit of this is that there are fewer filing requirements.
So, which is the best? The truth is that there is not a “one size fits all” solution. You need to carefully consider all the pros and cons and pick the vehicle that is most suitable for you and your needs. See if you can get it right first time and pick the right option for you as you grow.