With so many things to consider when setting up on your own, one of the most important is to think about the structure of your business. This will determine the tax structure that you will be operating in going forward.
To help you to be able to make an informed decision, we have taken the most popular structures and looked at the pro’s and con’s for each one.
Sole Trader
Sometimes known as “one man bands,” a Sole Trader is a business that’s run by one person, who takes full control, responsibility and makes all the decisions. This structure can also be referred to as a micro business due to its size, and is used by many skilled tradesman such as electricians, plumbers and decorators to name a few.
This structure will need to yearly account for all sales, expenses and profits for any income tax and National insurance. VAT will also need to be paid if the businesses yearly turnover exceeds the limits that have been set by HMRC.
Advantages and disadvantages with this structure include the following:
Full control
You would have full control over the daily and strategic planning and operations of the business and the size and rate in which you would wish for it to grow. However, this has it’s pitfalls in that you will be solely liable for any business failures, debts and other liabilities.
Easy to set up
The process to register is quick and easy as it would only be yourself that you would need to declare. You would need to inform the Inland Revenue that you are self -employed within three months of starting up. Failing to do this could result in penalties and charges.
Less regulations and start-up costs
There is less paperwork needed for a sole trader than there is for the other structures. You would need to fill in an annual self-assessment tax return form to the Inland Revenue each financial year. All financial information would be private and would not have to be registered to companies house at the end of each year as is with limited companies and you would not need to register your company.
No management or staffing required
As you would be working on your own, any profit made would not need to be split between anyone else. As great as this sounds, it is important to remember that your income will stop if you do. You will need to factor in your earnings if you decide to take holidays and plan for what would happen if you were suddenly taken ill. Critical illness insurance is available but it would be worth checking to see how long you would need to be off work for before this would take effect.
Lower accounting costs
As there is less work to undertake due to this being a personal tax return, accountants tend to charge less. A profit and loss account would need to be completed for the accountants to check, and it is advised to create a balance sheet and cash flow statement to help you control and manage the cash flow of your business on a regular basis.
Partnership
This is an agreement between two or more people to operate a business. Each partner has a proportion of or equal amount of shares with the same authority to run the business, and should be involved in the day to day operations and decision making. With any decision made, each partner will be held equally responsible. You can enter into a partnership with anyone, but it is advised to have an impartial lawyer draw up a partnership agreement for everyone to sign, and a business agreement can be created to protect you and the business should someone choose to leave in the future.
Advantages and disadvantages of a partnership
They are easy to establish
Partnerships are easy to establish, but to ensure that everyone involved has a clear direction on their individual roles. It is best practice to draw up a partnership agreement. Within this agreement you can determine the processes and course of action for any scenario including; what would happen if a partner dies, if one of more members of the partnership wishes to dissolve the partnership, as well as how the business will be financed.
Easy to raise funds
Unlike a sole trader, the ability to raise funds is increased. The members within the partnership may be able to contribute more, or the borrowing capacity maybe slightly greater. With this, any profit that is made must be split between all the partners. However, tension can be created if there is one partner who has put in less time than others, and this will need to be taken into consideration at the time of setting up the business.
Broader set of skills
Each individual will have certain strengths and skills to help drive the business forward. Just remember that when it comes to expanding or growing the business, some partners may or may not be prepared to take risks. This may cause a slow decision process and friction within the partnership, and can make the business not as flexible as it could be.
Limited Companies
A limited company allows the person setting up the business to keep their own assets and finances separate from the business along with a separate bank account. This means that if the aesthetic business was ever in a position where it needed to terminate trading, you should not have to use you own personal belongings to pay off any outstanding debts.
There are two types of limited companies to choose from:
Public Limited Company (PLC) – companies that allow members of the public to invest in the company and buy part of the business (known as shares). Any profits and losses made for the company must be made public on the Stock Exchange. There must be at least two directors of the business to be able to trade as a PLC. Generally, this is for very large business with a turnover of £20 million.
Private Limited Company (LTD) – can be run with one director, but differ to a PLC in that they cannot trade shares publically. These types of business are normally family run or business partners looking to run a business and wanting the protection that a limited company gives over a partnership.
Both private and limited companies must be registered with Companies House to be able to legally start trading. Each company will be taxed on its trading profits and where relevant will pay VAT on its products and services. The director or directors take full control of the running of the business and any person that has bought shares within the company (known as shareholders) help to fund the business and reap the rewards of any profits that are made. It is important to note that that under The Companies Act 2006 , a director cannot be under the age of 16.
Advantages and Disadvantages of Limited Companies include:
Financial security
Any debts accrued by the either a PLC or a limited Company should not fall to the Director the business to pay with any personal belongings. The shareholders become liable according go the levels of their investment (how many shares they own). For a limited company, it is important to remember that there is a restriction on the raising of capital when it comes to selling shares, as they are only available if someone wishes to invest in the shares.
Separate entity
A big plus for limited companies is that they will be able to exist beyond the life of its original members, as they are run and function as a separate entity. Employee security can be ensured with this, but there can sometimes be disputes between directors and shareholders of public companies when it comes to decision making for the business.
Don’t always need office premises
When you start out your limited company, your funds will more than likely be limited and a big office space is something at the present time that would not be needed. Until your business expands, you can run it from the comfort of your own home, and then claim back a proportion of the cost of heating, lighting and electricity from your business. The accounting for any limited company is more complicated than those of a sole trader with many different documents legally required to be kept up to date throughout the year. These can be difficult to understand, time consuming and costly, but they are essential.
Ownership and Control
Directors of Private Limited Companies are normally the main shareholders, leaving both the ownership and control in their hands. Decisions can be made quickly and effectively, but it can be difficult to know what the best option is when faced with a difficult decision, and mistakes and obstacles can occur. Public Companies don’t have it so easy. There can sometimes be disputes between directors and shareholders of when it comes to decision making as ideas and direction can vary between each individual. Further sales of shares can lead to more investors, with a counter balance of there being more people that are involved in any decision making and having to keep happy. Decision making therefore can be slow, and time consuming.
Making the right decision for your aesthetic business
There is not right or wrong choice when it comes to deciding on the type of business you want to be. Each type has their differences, advantages and disadvantages which all need to be taken in to consideration.
To ensure you make the right decision for you we advise that you:
Conduct more research on all of the structures – gather as much information as possible to help you be certain of your choice.
Seek advice – if you find yourself with information overload, or you’re still not sure, you can make an appointment with a business manager at your local bank, or with an accountant who can give advice on what they think would be the best option for you.
Our team can offer support for you and your business after completing one of our courses. If you would like to find out more information on the courses that we offer, please call the team on 01844 3901101 or drop us an email; [email protected]
You can also enroll on our online business course to further your knowledge here!
