Starting a business is an exciting venture, but one of the most critical decisions for any entrepreneur is determining how to structure their business. The ideal structure depends largely on the number of stakeholders involved and the nature of the business itself. For owner-managed businesses, where the owner actively participates in day-to-day operations, choosing the right structure can significantly impact legal responsibilities, tax obligations, financing options, and future growth opportunities.

Choosing the Right Business Vehicle

When setting up a business, individuals have several options for the type of legal entity through which they can operate. Each structure has its advantages and drawbacks, depending on legal, commercial, and tax considerations. Common business vehicles include:

  • Sole Trader: A straightforward option where the individual owns and manages the business personally. It is simple to set up, but the owner is personally liable for the business's debts.
  • General Partnership: A partnership between two or more individuals who share profits, responsibilities, and liabilities equally. It is flexible but requires trust and collaboration among partners.
  • Limited Liability Partnership (LLP): Combines elements of partnerships and companies, offering limited liability to partners while retaining flexibility in management.
  • Company: A separate legal entity owned by shareholders and managed by directors, offering limited liability and various opportunities for raising capital.
  • Limited Partnership: Features both general partners, who manage the business and assume liability, and limited partners, who invest but have limited liability.

The choice of business vehicle may be influenced by commercial and legal reasons.

Additionally, the tax implications of each structure play a pivotal role in the decision-making process. This article will focus the tax considerations. 

Financing the Business

Financing is a crucial aspect of structuring a business, with options often dependent on the chosen structure. Sole traders and partnerships may rely on personal savings or loans, whereas companies have more sophisticated avenues for raising funds, such as issuing share capital. For companies, tax-incentivised investment schemes like the Seed Enterprise Investment Scheme (SEIS), the Enterprise Investment Scheme (EIS), and Venture Capital Trusts can provide significant advantages in attracting investors.

Where to Operate the Business From

The location of operations can also impact the structure and taxation of a business. While some businesses require specific premises, such as retail shops, others may opt to trade from home, which can reduce overhead costs. The tax implications of leasing or purchasing premises should also be carefully reviewed, including considerations about ownership – whether individually, jointly with a spouse or partner, or under the company's name.

Expanding or Selling Overseas

As businesses grow, some may look to expand into international markets. Different structures are suited to international expansion, with companies often being more conducive to managing cross-border operations compared to sole traders or partnerships. 

Transitioning to a Company

Many owner-managed businesses initially start as sole traders or partnerships and later incorporate as a company to take advantage of limited liability, tax benefits, and enhanced financing options. Incorporation, however, comes with its own set of tax considerations, including impacts on income tax, capital gains tax, National Insurance Contributions (NIC), and corporation tax. Further thoughts can be found in this article. 

Personal Service Companies (PSC)

In some cases, individuals may choose to provide their services through a Personal Service Company (PSC). This setup involves the worker establishing a company and serving as its main shareholder and director, allowing the client to contract with the company rather than the individual directly. While PSCs can offer certain tax advantages, they are subject to specific rules, particularly under the off-payroll working regulations (IR35).

Extracting Profits

Once incorporated, business owners have multiple options for extracting profits, such as dividends, rent, interest, loan repayments, pensions, or proceeds from the eventual sale of the company. The methods chosen can affect taxation and should be carefully planned. 

Other Considerations

There are additional considerations when structuring an owner-managed business, including:

  • Close Company Rules: These apply to companies owned by a small number of people. 
  • Business Asset Disposal Relief: Formerly known as Entrepreneurs' Relief, this offers tax benefits upon selling a business.
  • Inheritance Tax (IHT) Business Property Relief: Understanding the availability of this relief can aid in estate planning for business owners.

Final Thoughts

Choosing the right structure for an owner-managed business is a multifaceted decision that requires careful consideration of legal, commercial, and tax factors. Whether opting for a sole trader model, partnership, or company, the choice should align with the business's goals, stakeholders, and long-term vision. By leveraging expert resources and guidance, entrepreneurs can make informed decisions that set the foundation for sustainable growth and success.

You can always contact us if you require any advice or support.