Deciding on a business structure is one of the most important elements in a new business. Often it is the key aspect that has serious ramifications on growth. The future expansion of a business is also dependent on this factor. Often the core structure impacts tax liabilities and the fundamentals.
Depending on the nature of the business, you have to decide on the business structure. Each one has its own set of advantages and disadvantages. For example, if you don’t envisage raising funds on the exchanges, you don’t have to go for a PLC or Public Limited Company.
Types of Business Structure
There are four main categories of business structure that you can choose from.
As the name indicates, you are the exclusive owner. You get to keep all the profit but need to take the losses too. A sole proprietorship is one of the simplest business structures. It is easy to put together, and you have complete control. It does not involve too much financial reporting either. But at the same time, the complete debt liability is on you. Moreover, this type of structure lacks credibility. You also end up paying a higher tax. However, most new businesses go for this route because of its simplicity.
This is a partnership between two or more entrepreneurs. These partners share the management responsibilities as well as have a profit-loss arrangement. So, in many ways, it is like a sole trader, albeit there are two or more owners. The advantage is this setup increases the chances of you raising funds in the future, should you need to.
This type of business is still a private setup. But at the same time, the personal exposure is limited. The owners, in this case, have debt responsibilities only to the extent they invest in it. So, the tax liability is far more favorable and you operate in a corporate setup. This, however, needs a fair bit of financial reporting. All the company’s accounts need to be made public. This is the most common type of business set up, and you can be up and running with a new business in hours by using a company formations agent such as https://www.1stformations.co.uk/.
This stands for Limited Liability Partnership. The partners have limited liability in this case. So, it marries the advantages of a limited company along with a partnership. As a result, companies structured as LLPs exhibit distinct flexibility. But you have to start trading within a year after you register a company name. The tax liabilities are also different. The profit, in this case, is taxed as income and every partner has to disclose the income amount.
So, before you register a company, you have to consider drafting a detailed business plan. Not only is the nature of the business important but the future goals as well. Additionally, you must have a clear perspective about how you want to go about funding. In case you feel you cannot handle it alone, you must keep a provision for incorporating partners. Startup capital and risk appetite also play a role in finalizing business structure. But your profit outlook and debt exposure will impact the final decision. Once you have finalized all these factors, you can go about deciding the business structure. Getting the right balance is crucial.