UK Fact-File Part 1:
Business Formation for Individuals
1.1 UK Individual Business Structures
Forms of company or business structures used by individuals
in business
There are several types of business structure
that can be established and the most suitable form will depend
on the nature and size of the enterprise. Typically, the most
common forms of business likely to be of interest to individuals
are the sole trader, partnership and the private limited company.
The simplest way to set up a new business is to trade as
a sole trader. This is ideal for a small business where the
work is largely carried out by the proprietor of the business.
There is no need to inform Companies House of the new business,
thereby avoiding some of the more stringent rules that apply
to limited companies. However, some of the tax benefits available
to limited companies do not apply to sole traders.
Unlike limited companies, a sole trader is personally liable
for debts incurred whilst trading, and ultimately could be
made bankrupt should the business fail. A sole trader can
run a small business and still be employed elsewhere but should
seek advice as to their position with regard to tax and National
Insurance Contributions (NIC) liabilities.
Class 2 National Insurance Contributions (NICs) must be paid,
and income Tax will be paid at the personal Income Tax rate
(traditionally 20% to 41% depending on taxable income, but
from April 2010, a 50% rate is imposed on taxable income over
GBP150,000) . Corporation Tax is currently between 21% and
28% for company taxable profits up to GBP1.5m turnover, but
from April 2011, the rate for small companies will drop to
20%. The 28% higher rate for larger companies will also drop
one percentage point to 27% in April 2011, with further annual
incremental cuts announced by the government, designed to
eventually bring the rate down to 24% by 2014.
A partnership is where two or more people share (equally
or as specified in a partnership agreement) the costs and
responsibilities of setting up in business. Partners are usually
self-employed and each takes a share of the profits, and is
taxed on their share accordingly; it is advisable to ask a
solicitor to draw up a simple partnership agreement.
In the event of the resignation, death or bankruptcy of a
partner, the partnership must be dissolved. Partners are personally
liable for debts incurred by the business partnership and
their personal assets may be at risk from creditors, even
though other partners of the business might have incurred
the debts.
Another form of partnership is a Limited Liability Partnership
(LLP). With this form of partnership (which must comprise
at least two members), there is limited personal liability
for individual partners, but there is a general partner with
wider responsibility. As with an ordinary partnership, partners
are responsible for their own tax affairs and filing.
A limited company exists in its own right as a separate entity.
Consequently, the finances of the company are distinct from
the personal finances of the owners of the business. A limited
company must be registered (incorporated) at Companies House.
Limited companies must have at least one director and must
appoint a qualified company secretary. A limited company can
comprise as few as two directors, and only one or two employees.
Limited companies must inform HM Revenue and Customs of the
existence of the company and that they are liable for Corporation
Tax – an annual return must be submitted. Limited companies
must also file accounts annually with Companies House and
they usually have to be audited.
The type of limited company that is of interest individuals
in business is limited by shares, and each member’s liability
is limited to the amount unpaid on their shares. A private
company cannot offer its shares to the general public for
sale.
The terms 'Freelance', 'sole-trader' and 'self-employed'
A self-employed individual may variously be described in
the UK as a freelance worker, sole trader, sole proprietor,
self-employed, entrepreneur or similar term; regardless of
how they are described or describe themselves, HMRC’s primary
interest is in whether the individual is employed or self-employed
for the purposes of liability to pay income tax and NICs,
or whether they are employed, and will therefore have these
deducted at source.
This has been a controversial area in recent years; the UK
tax authority is keen to minimise ‘concealed employment’,
and has put in place legislation to this effect, commonly
referred to as ‘IR35’ legislation, although the Conservative-Liberal
Democrat coalition has pledged to review the rules in this
area.
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