Structuring Your Small Business - Sole Trader, Partnership, Umbrella or Limited?

When starting a new business, most people tend to choose the default sole trader structure option to begin with. After all, it's just one thing to think about in a huge array of tasks and activities to get set up and going. However, it's well worth considering business structure carefully and looking at the various options available to check whether or not the default option is actually the best choice for your particular business. Other options include a limited company and an umbrella company, both of which bring their own legal obligations, advantages and financial implications.

For small businesses, sole proprietorship is often ideal - it's functional and easy to operate, particularly for new start-ups. Larger businesses, however, may be better suited to corporation status or limited liability incorporation. It may also be the case that if you are an IT contractor, for example, that the client states that you must work through your own limited company. There will be factors to consider to help you make your decision and it's worth getting the advice of a business advisor or tax expert, particularly with the financial implications and longer-term planning in mind.

The size of your business will be crucial. Smaller businesses with less income are best set up as sole traders or partnerships. This will be easy to manage, require minimal paperwork and external regulation and allow the business to continue operating flexibly and nimbly. This will be very important to many time-stretched entrepreneurs at the start of the business's operation, when time and money is at a premium and paperwork doesn't represent an appealing operational activity compared to sales and marketing! Of course, to help keep control of the paperwork associated with a business of any size, it is important to always use good accounting / bookkeeping software such as MyBookkeepingManager.

When annual income starts to reach and surpass around £75,000, the business may need to be restructured into a company. Advice should be taken from professional sources, particularly with regards to the tax advantages and disadvantages of each structure and the requirements of your particular industry. It's worth looking for advisors and accountants who specialise in your sector and have a good working knowledge of it.

The type of structure will depend on who owns the business. If there are a range of owners, then a partnership will work well for a small business and spread both risk and financial obligations among the partners. At the close of each financial year, the partners will complete a tax return with worksheets from each partner, dividing the income and also the tax liability that accrues to each, depending on the shares they have in the business and the profits and losses that have occurred during that year.

Risk exposure is another factor to consider. Personal assets can be put in danger if a sole trade or partnership faces legal action. For certain high-risk businesses such as medical practices, law firms and investment businesses, the possibility of being sued or accused of professional negligence is too great to take a chance. In such instances, company incorporation is the best route and will segregate personal assets and professional assets in the event of legal action.

Finally, money is critical. Limited budgets are best suited to sole-trader or partnership status as these cost little to set up. Formal incorporation costs money and requires professional assistance. At the start of a business, many entrepreneurs are using their overdraft and Barclays credit card in a bid to make funds go as far as possible. Incorporation may be something that they visit later down the line, when the income is flowing in and the business is profitably established.

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