What type of company is best for me?
If tax and accounts sometimes feel like an enigma, you’re not alone! Whilst talk of balance sheets, corporation tax and VAT might seem completed, we’re here to help you wrap your head around all the tax and accounts basics. So, in this first post, let’s look at different types of companies and the tax rules and responsibilities that come along with each one.
Limited Liability Company
The most important thing to understand about a limited liability company? That it’s legally separate from its shareholders and directors. This means that both directors - the people running the company - and shareholders - the people who own it – are potentially not personally liable for losses.
Whilst this offers an element of protection, there are plenty of hoops you need to jump through to set up a limited company. As well as filing corporation tax, a limited liability company is also obliged to file annual reports to Companies House.
Accounts and documents filed with Companies House essentially become public knowledge. Whilst limited if you’re a small company, it’s possible that anyone can look up the information available on Companies House. The flipside? This type of company is often the most tax efficient.
The truth is, setting up as a sole trader or partnership is often the simplest way to start a business. With this type of company, there’s essentially one person - or perhaps a collection of people in partnership - who own and run the business.
Compared to running a limited company, being a sole trader involves a whole lot less paperwork. It comes with fewer reporting requirements and there’s no need to register and file with Companies House.
So, why doesn’t every entrepreneur become a sole trader? Simply because it’s not as tax efficient. As a sole trader, you’ll pay income tax and national insurance as opposed to corporation tax on business profits. You’ll also be at a disadvantage when it comes to benefiting from tax relief and accessing business finance.
Limited Liability Partnership (LLP)
Somewhere between an LLC and a Sole Trader, there’s another entity: a Limited Liability Partnership. This business structure is a wise choice for professional services that traditionally work as partnerships, such as architects, accountants and lawyers. It’s also well-suited to property partnerships.
An LLP has independent legal status, offering limited liability to its members. Yet, to get this protection, accounts must be reported to Companies House. When it comes to tax, LLPs do not need to file corporation tax as each member is personally responsible for paying income tax on their individual profit.
Making Tax Simple With Clarity
Still unsure which is the best type of company for your business? We’re here to help! With a deep knowledge of company structures and all the tax regulations and responsibilities that go with them, we can help you make a wise choice.. Get in touch today to find out more!