If you are setting up a new business one of the options, you will need to consider is your business structure. There are two basic choices:
- Be self-employed, or
- Incorporate your business, be a limited company.
There is a world of difference between the two options.
Self-employed
Self-employed suggests that you work on your own, and this is certainly one self-employed option, but there are others.
You could have a business partner, or partners, and trade as self-employed but in a formal partnership arrangement. There are two basic types of partnership: a limited partnership (where the partners are not personally liable for any business risks) and a non-limited version where the partners’ personal assets are at risk in the event that the business cannot pay its debts.
This personal liability aspect is one of the key reasons that need to be considered when deciding on a structure for your business. The other is the impact of NIC and income tax.
If you are self-employed the profits of the business are taxable based on the tax status of the business owner or owners. There is no flat rate applied to business profits. The more you earn, the more NIC and income tax you will pay. And don’t forget, if you are self-employed and you run into financial difficulties, your personal assets may be at risk – unless you have opted for the Limited Liability Partnership arrangement.
A limited company
Alternatively, you could set up a limited company that is treated as a legal entity in its own right. Companies pay corporation tax, not income tax, at a single rate, presently 19%.
At first sight it may seem like a no-brainer, why would you be self-employed and pay much higher rates of NIC and income tax? Combine this with the limited liability aspect and the argument for trading as limited seems compelling.
Planning is key
Every potential new business-person should consider both options. There are pluses and minuses to each, and both need to be considered.
If you are thinking about a new business, perhaps your first venture into self-employment, please call so we can help you consider all the possibilities. This is not a process to be taken lightly and messing up could prove to be very expensive.
For more information call us today on 0141 887 7766.
Source: DocSafe
