Webinar: Choosing the right legal structure for your business
Hello and welcome to this bite-sized webinar from Companies House and the Business Support Helpline. This is a series of 3 short webinars over the next 3 weeks, so please join us for the next 2 at the same time the next week and indeed the week after. I'll just give you a quick overview of the series to allow people to join us online, today we have been joined by the Business Support Helpline and we'll be covering choosing the right structure for your business mainly concentrating on the most popular options of sole trader and limited company.
Then next week, at the same time, we'll be looking at the requirements for starting and running a limited company. The week after that we'll be covering starting a community interest company with colleagues from the community interest company team. Now my name is Gary Townley and I am part of the comms team here at Companies House and I'll be joined in just a few moments by Stephanie Kirkwood and Lee White from the Business Support Helpline who will be delivering today's presentation. Now in addition to us, there is a team of Business Support Helpline and Companies House experts in the background awaiting your questions so if you have any questions about the structure of your business then this is your opportunity to get first-hand advice from the experts.
So as I said for you feel free to send your questions to us throughout the presentation, now we can only deal with general questions and can't go into specific cases, so if you've got a general question please ask as we go along today. So I think most people have joined or are still joining us now but if you are new to the GoTo Webinar system, I'll just take you through the look of the screen. So if you'd like to ask a question, you'll see on the tool panel that there is a questions box, now to make this bigger, you simply click on the icon that looks like an arrow coming out of the box, that makes that box bigger and then you can type your question into that box. Smartphone and tablet users, if you're joining us on those sort of devices, you can ask questions by using the question mark symbol on your screen. So if you want to just test that before we get going, let's just say, if you can say where you're listening from today, I'm based in Newport usually our office's in Cardiff, our offices again are closed at the moment so we're working from home.
Give a minute while they come in, now also let me explain in that panel there are a couple of handouts, and they will take you to some of the information that we are covering today, so if you want to download those now, or download those during today's presentation that'll be great. If you're watching a recording and you want copies of those handouts, just drop us an email at firstname.lastname@example.org and we'll send those out to you. So many people also ask if they can have a copy of the presentation and indeed you will be sent a link to this recording in the follow-up email which goes out about 24 hours after we finish today but also all our webinars now appear on our YouTube channel, which again are available about 24 hours after the recording has finished. So I think that's everyone familiar with the question box so let's begin this morning's short presentation, should only take around 20-25 minutes.
So as I said today we are looking at choosing the right business structure for your business and the agenda will include things like considerations, key characteristics, business names, tax and employing people and as I said today's presenters are Stephanie and Lee from the Business Support Helpline. So, good morning both. Hi. Good morning everyone. Good morning. Right, so we'll get cracking. So good morning as we said and welcome to today's webinar. My name is Stephanie Kirkwood and I'm here with my colleague Lee White. We are both business support advisors from the Business Support Helpline and that is the government provision for free business support.
We are a free signposting service offering support and guidance to those looking to start a business or those already running one. The aim of today's webinar is to compare the characteristics of a sole trader and a limited company and we hope this will assist you in making a more informed decision as to what you feel is the best suited legal structure for both you and your business. We've prepared a handout which Gary mentioned and that provides a list of resources that we will be referring to throughout today's session and it can be downloaded from the tool panel as Gary explained earlier.
We have also got a couple of colleagues on hand during the webinar to answer any questions that you may have, so do keep them busy. So, moving on to the first slide and over to Lee with the considerations. Good morning. So when choosing between a sole trader and limited company there are a number of factors to consider before making your decision.
We've listed the main considerations on the slide, these are the type of questions you should be asking yourself when you consider financial risk surrounding a new business. Does the business require a lot of investment? Will you need suppliers on credit? Is it a risky sector? When considering growth aspirations, think about how much you want to grow, what level of turnover and profit do you expect and are you anticipating taking on any staff members? When thinking about your tax position, consider if you have any other income. Will your income exceed your personal allowance, basic or higher rate tax threshold? And when considering which sector you will be starting in, think about how your customers or suppliers perceive your business. Is a limited company to be considered a more professional entity or preferred option? As this can be the case in certain industry sectors. The answer to some of these questions may well become clearer after your market research and financial forecasting.
You will then be better equipped to make a decision on the right legal structure for your business. Choosing the right legal structure is vital and will avoid exposing you to unnecessary costs and risks. Your business' structure will determine how and what tax you pay, the amount of control you have over your business, the level of paperwork you'll need to deal with and your responsibilities if your business makes a loss or is unable to repay any debt.
So let's have a look at the key characteristics of each structure, this will give you a better idea of the overall purpose and requirements of each and the main differences between the 2. So, a sole trader is essentially someone who is self-employed and therefore is the sole owner of their business. It's the simplest form of business structure, which is probably why it is the most popular type of business in the UK. There's no legal separation between you as the business owner and the business itself so in effect you are the business. As a sole trader, you are classed as self-employed and cannot be your own employee although you can take on other members of staff.
In contrast, setting up a limited company means you are creating a company which exists separately to you. By that we mean it has its own legal entity. Due to this it's a more complex process with more accounting regulations than the sole trader, and we will go into that a little bit later. As a shareholder, you hold all or a proportion of the company's share capital and you act on behalf of the company as a director. You can also be an employee of the company, and we'll discuss this again in more depth further on in the webinar.
As explained, when you are registering as a sole trader you are trading as an individual whilst a limited company involves creating a separate entity and therefore the registration process is more complex. This slide explains the registration process for both structures and what is involved. Setting up as a sole trader is fairly simple. To register you need your national insurance number, which will be used to inform HMRC that you are registering for self-assessment tax returns via an online form.
You do this by creating a government gateway account through gov.uk and this is completely free. Once registration is completed, you will be issued with a unique tax reference number commonly known as a UTR and this identifies you as a self-employed taxpayer. You should register as soon as you start to trade, but are legally required to do so by 5 October of the second tax year to avoid any fines. And a tax year runs between 6 April and 5 April. There is a trading allowance which means those who are self-employed and expect their gross income to be no more than £1000 may not have to register for self-assessment.
We can however still voluntarily register to pay class 2 national insurance contributions. There are some instances when you can't use this allowance, so it is advisable to speak with HMRC to glean some clarity. Sole traders operate completely privately and aren't required to make their information and business accounts public.
A limited company is a company limited by shares or limited by guarantee. Limited by guarantee companies are usually not for profit, and although we will touch on other structures towards the end of the webinar, for purpose of comparison, we will be focusing on limited by shares companies. This means you issue shares for a proportion of the business that you own If you are starting a company on your own, you will hold 100% of your shares and therefore will only be the one shareholder. You can register a company online or by post at Companies House. The cost and timescales are shown on the slide. When setting up a limited company, many people use formation agents or accountants to register the business on their behalf. This would normally be a chargeable service and once registered you'll be issued with a certificate of incorporation which would detail your company number and date of formation.
In addition to this, you'll need to register with HMRC for corporation tax and this must be done within 3 months of trading. In contrast to a sole trader, the details of a limited company have to remain transparent by law and details will appear on the Companies House register which is available publicly. You can change your legal structure at any time, although it is worth mentioning that it is certainly easier to move from a sole trader to a limited company, than the other way around. Business names. So, as part of the registration process, you will need to decide what name you are going to trade under. The rules differ around business names, depending on the legal structure of the business. As a sole trader, you can trade under your own name or you can choose a trading name for your business.
There's no requirement to register this name. However, you must include your name and business name - if you use one - on official paperwork, for example on any invoices and letters. You register a limited company by its name at Companies House, therefore you will need to ensure that this is different to any existing company. You can trade using a different name to the one you registered under and this would be known as your business name. In both instances, the name must not be the same as an existing trade mark or too similar to another business within the same industry or geographical area as you could be seen to be passing off yourself as another business. Whether a soul trader or a limited company you can choose to register your trademark to protect your brand.
For example the name of your product or your service. As with anything you will need to balance the cost of applying to register your name as a trade mark against the advantages of registration. Essentially registering a trade mark is the highest level of protection for your trading name and can be considered irrelevant of the structure that you choose. Having a full and thorough awareness of risks involved and an understanding of where your liabilities lie will help you decide on the best legal structure for your business.
As a sole trader, you are the business, therefore any business decisions, profits and debts are the responsibility of the owner. If your business is in financial difficulty or has any debts you are unable to pay, your personal assets could be at risk. Suitable insurances such as public liability, professional indemnity and employers liability insurance, to name a few could protect you in the event of any legal disputes. With a limited company, if your business runs into difficulty and you are unable to pay money you owe, the limited liability aspect protects your personal assets from being affected. You will maintain responsibility for any personal loans or anything you are a personal guarantor on. This means that your liability for the business is limited to how much you have invested.
In the event of any legal dispute, without suitable insurance, it is the company that will be liable. However, there are some exceptions, such as if there is fraud or if the directors are acting illegally. The complexity of reporting is vastly different for each structure. So as a sole trader you will need to keep records of your business sales and expenses, such as receipts and invoices, ideally, you should do this monthly, you don't have to submit these but they must be kept for 5 years for auditing purposes. Expenses must be wholly attributed to the business.
So if there's something that you use and you can identify a proportion of an expense that relates to the business, so for example utility bills when running a business from home, or using vehicles, you can account for this portion as a business expense. HMRC have a flat rate that you can use to calculate these expenses based on the number of hours worked from home and or the number of business miles that you've done. There is a link to this included on the handout. In terms of deadlines, a self-assessment tax return is due annually, and if you're completing this by post the deadline is 31 October following the tax year end or the 31 January for online submissions. HMRC will then calculate what you owe based on what you report and this is due to be paid by midnight 31 January. There are penalties for late submissions.
As the name suggests, the self-assessment process was designed to allow you to submit to without the need of an accountant, however, there are plenty of bookkeeping tools to support you should you need them, we've included some examples of these on the handout. If you do feel you need extra support with this you can pay for the services of a bookkeeper or an accountant There are more complex accounting regulations with a limited company. So you must submit a register of people with significant control, file full statutory accounts with HMRC and Companies House and submit a confirmation statement. As with the sole trader, expenses must be wholly attributed to the business. As a limited company, you are more likely to need an accountant and would have to factor in these costs.
Companies House will be going into this in more detail on their webinar next week so do register for that if you haven't already. Crucially, the legal structure of your business will also determine how much tax you pay. Therefore, it is important to know how you can take money from a business as well as your projected turnover and profit.
As a sole trader you don't pay yourself a wage or salary as any profit you make is classes your income. This can be spent throughout the tax year, though it is important to remember that you have not yet paid tax on these profits and therefore need to budget for this. HMRC have a ready reckoner tool, which allows you to budget by entering your estimated profit to get an idea of how much income tax and national insurance you need to set aside. In regards to a limited company, any money that comes into the company is owned by the company rather than you as a person, so this money must be accounted for.
To take money out of the company as a salary, assuming that the company can afford this, the company would have to employ you as a member of staff. As with any employment, any salaries are subject to PAYE and national insurance contributions. You can also take a dividend as a shareholder, subject to a company operating at a profit.
You can pay yourself by either one or a combination of the 2. As mentioned your tax position is one key consideration, and depending on your income and circumstances there may be one structure that may be more tax-efficient and you should seek professional advice. So how much income tax you pay each year depends on how much of your taxable income is above the personal allowance and how much of this falls within each tax band.
As you can see the slide details the thresholds which would apply as a sole trader but also does apply as an employee of your limited company. So these are the current rates, but as these can change we would refer you to the gov.uk website. So to give an example, a sole trader with no other income and profits of £55,000 the breakdown of tax would be as follows, the first £12,570 would be tax-free as part of your personal allowance, you'd then pay 20% tax on the income between £12,571 and £50,270 and then you'd pay 40% tax on the final amount which would be around £4,729.
The slide also illustrates the thresholds for class 2 and class 4 national insurance contributions. So as you can see you do not have to pay if you earn less than £6,515 a year although you can choose to pay voluntary contributions. Tax and national insurance will all be shown on the same bill with separate breakdowns for each.
Moving on to a limited company, after all salaries and expenses have been paid, the company pays corporation tax at 19% on all of its profits. Any money taken out of a company is also subject to tax. As an employee, you will pay the same level of income tax as a sole trader shown on the previous slide. You would also be subject to class 1 national insurance contributions instead of class 2 and class 4. If you take a dividend out of a limited company the first £2,000 is tax free.
Dividends are subject to different taxation around income tax. However, they are dependent on your income tax band, again these are subject to change so we would refer you to gov.uk to check. So as we explained at the outset of the webinar, your tax decision is one of the key considerations when choosing the legal structure of your business.
As a limited company can pay you in different ways, forecasting your sales and profit is imperative to understanding which option would be most tax efficient. So, given the name, a lot of people mistakenly assume that you have to work alone in order to operate as a sole trader, but this isn't the case and irrelevant of the structure that you choose your business can employ staff. If you choose to employ people, you must collect income tax and national insurance contributions from them via PAYE (pay as you earn) and a payroll system, and pay those to HMRC. There are exceptions to this and HMRC would be able to advise further. If you'd like to understand more on your responsibilities on employing staff, please do contact us at the helpline and we can chat through this with you.
As we've discussed today both structures have their own particular advantages and disadvantages. The option that's right for you depends on the size and nature of your business along with your own personal circumstances and growth plans. It's essential not to rush into any decision and spend some time researching the legal structure that's the best fit for you as well as getting some professional advice from an accountant.
You may find it useful to use the free accountancy consultation through the Institute of Chartered Accountants for England and Wales and their business advice service to help with deciding on a legal structure. Details can be found in the handout. So if the structures we have focused on today aren't quite the right fit for your business maybe because of the number of people involved or the profit structure, there are other options available. We will touch lightly on these but can go into more detail if you would like to contact us.
So a partnership. A partnership operates similarly to a sole trader but involves 2 or more partners. Partners share the business profits and each partner pays tax on their share and also personally share responsibility for the business. A partner does not have to be an actual person, for example, a limited company counts as a legal person and can also be a partner within a partnership. Each partner would individually register for self-assessment and a nominated partner would also register the partnership and would be responsible for managing the partnerships tax returns and keeping the business records. And we have an LLP. So you can set up or incorporate a limited liability partnership to run a business with 2 or more members.
A member can be a person or a company, known as a corporate member. Each member pays tax on their share of the profits, as in an ordinary business partnership but isn't personally liable for any debts the business can't pay. You will need to register the LLP with Companies House. Public limited company.
Legally abbreviated to PLC this is a limited liability company whose shares are sold and traded to the public with the minimum share capital of £50,000. A social enterprise structure. So a social enterprise is not a legal structure as such, but a term which defines that a business was set up with a social, charitable or community based objective rather than for profit. There are a number of structures that are compatible with the social enterprise those of which are listed on the slide. There are a number of resources as well that can support social enterprises and we'd be happy to discuss this in more detail at the Business Support Helpline.
We hope that you have found this webinar useful and have answered some of the questions you had. As we mentioned at the start of our presentation, the Business Support Helpline is a free service and our experienced advisors can save you valuable time in finding the right resources to help you plan for the success of your business. All members of our team have a wealth of business knowledge and the information we provide is completely free and tailor-made for you. Thank you for your participation, should you require any further support please do contact us on any of these methods.
We're still here to answer questions throughout the rest of this webinar so please send them through and we'll be happy to answer them. Brilliant, thank you very much both indeed. We've had lots of questions coming in and we'll try and answer as many of those as we can during this session.
Obviously time flies, we're having so much fun and we're nearly at the half-hour mark, so i'll just quickly run through the last couple of slides. I'll just quickly mention our new online learning tool, this is a completely free tool and take you through the responsibilities of being a company director, how to file your confirmation statement, how to file your accounts, what records you need to keep and where to keep them. So if you want to have access to that, again the link to that is in the handout which I would suggest you download now before we end the webinar. It takes you about 25 minutes to complete the tool and it's divided into different useful sections so you can dip in and dip out if you so wish and it's also got links to our useful how-to videos if you want to look at those as well.
Now I will mention email updates, it's really worth signing up to email updates so we can keep you informed of any changes and the latest news from Companies House. This is separate to the email reminder service that lets you know when you're filings are due if you have a company, and it's really quick and easy to sign up to our email update updates. Talking of email reminders, if you've got a limited company make sure you sign up for email reminders so we can tell you when your annual filings are due. You can choose up to 4 addresses so make sure you don't miss out on those important deadlines. And we also have, as you'll see on the screen there, our directors' toolkit which will answer a lot of the questions if you are a company director.
And again, as I said, links are in the handouts. So please download those handouts now. So that's about it, we're rapidly running out of time coming up to 10.29am, we're going up to half-past. So we've had lots of interesting questions coming in, we'll try and finish answering those in the next minute or so, if we don't get around to answering your question, we will get back to you by email in a couple of days. Okay, so thank you very much for listening. I'll leave you with uh just some useful contacts as I say your first port of call - obviously the Business Support Helpline if you're based in England.
So get in touch with them if you've got any queries about your business structure, financing, really anything about starting a business - they're going to be your first port of call. Please download the handouts, if you're listening to this again and you want the handouts, give us a mail at webinars@ companieshouse.gov.uk. Remember, we will send you a link to the recording of this webinar in the next day or so and again you can view them in about 24 hours time on our video library on our YouTube channel. So thank you again for joining us. Thank you so much to Stephanie and Lee, and colleagues who are fielding the questions. Don't forget to sign up for next week's webinar, where we'll be covering starting and running a limited company and then in 2 weeks time, if a community interest company is your business structure, then join us for that one and that'll talk you through all the things you need to know about starting a community interest company. So very much thank you for joining us. Goodbye, and we'll see you on the next one.