Richard from Simplicity Accounting, a Belfast based Accountancy firm give Startacus (and all you good folk) some handy pointers on choosing your business trading vehicle. Over to Richard to explain.
Choice of trading vehicle?
First of all you may ask yourself, “what on earth is a trading vehicle?” Your trading vehicle is the legal status of your business, and beyond matters of the law, it is also significantly a determining factor in the tax rules that apply to your business.
Your “trading vehicle” is a matter of choice, the options being dictated by whether your business is just yourself, or whether you are working alongside somebody else (a business partner rather than an employee). There are pros and cons for each option, and these should be weighed up before making your choice.
Working by yourself
If your start up business is just yourself, the choice of trading vehicle boils down to two options: either a sole trader or a Limited Company.
With a Limited Company, your personal assets (such as your personal savings and house) are protected in the event of business failure and a broader range of tax planning options are available to you. Very importantly for business start ups, is essential to be a limited company to be able to be granted Enterprise Investment Scheme (EIS) approval (which would offer individuals tax incentives to invest in your business). There is often a prestige attached to trading through a limited company and it may help with your business image and (unfairly) improve your chances of being successful in a finance application.
If you trade as a sole trader, you do not enjoy the benefits mentioned above, however you have lesser administrative burden to comply with. Although you still have to prepare annual accounts to calculate your tax liabilities, these do not have to be filed on a public register and can be prepared to a slightly lower standard.
Working with a partner
When working with a partner, you are faced with three choices of trading vehicle: a partnership, a Limited Liability Partnership, or a Limited Company.
Working as a Limited Company has the same pros and cons as mentioned above, and a partnership is basically the equivalent of each partner being a sole trader, so also has the same pros and cons. The main difference between a partnership and sole trader is that there is a slightly increased administrative requirement as you will have to draw up a “partnership agreement” to document each partner’s responsibilities and to agree the proportion in which partnership profits are shared. Also, in addition to your personal tax return, a partnership tax return has to be completed, and submitted.
A Limited Liability Partnership (LLP) is a compromise between a partnership and a Limited Company, enjoying the same legal protection as a Limited Company (with a similar administrative burden), yet being treated in the same way as a partnership for tax purposes.
The choice of trading vehicle is an important one and should be considered at the outset of a business to avoid the complications of changing at some point in the future. Of particular benefit, particularly to high risk start ups, is the protection of personal assets granted by Limited Companies, but you must be prepared to comply with the administrative obligations, and it should be noted that this legal protection does not apply if you behave recklessly.
Practical considerations should always take priority over those of taxation, but it should be noted that there are more opportunities to reduce tax through a Limited Company, and furthermore, a Limited Company is attractive if you plan to raise capital by attracting investment from private individuals, and your business qualifies under the Enterprise Investment Scheme.
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