A Guide to Business Structures

Choosing the right business structure for your operations in the UK is an important decision that can have a significant impact on your success. In this guide, we will be providing information on the most common business structures used in the UK – Sole Trade, Limited Company, and Umbrella Company. 

Read on to find out which business structure is the right one for you. 

Sole Trade

Sole trade refers to a single-person business in the UK, with an individual being solely responsible for the actions of their business. Sole traders do not have to register as a limited company and are not subject to corporation tax, but they do have to pay income tax. The profits of sole traders are also subject to self-assessment tax returns.

Advantages of a Sole Trade include:

  • Easy to set up without the need for additional paperwork 
  • Low costs and minimal paperwork involved in running your business 
  • Flexible decision-making process compared to limited companies 
  • Ability to keep all the profits you make 

Disadvantages of a Sole Trade include:

  • You can be held personally liable for any debts and losses incurred by the business 
  • Limited access to financial resources compared to limited companies or umbrella companies 
  • Difficult to separate finances between your personal and business life 

Limited Company

A limited company is a separate legal entity from its owners and shareholders. As such, limited companies are subject to corporation tax, which is at a different rate from income tax. Unlike sole traders, profits made by limited companies are not taxed directly, but instead, the money that is left after paying corporation tax is then divided amongst shareholders.

Advantages of a Limited Company include:

  • Separate legal entity meaning the business and its owners are legally distinct entities 
  • Access to more financial resources 
  • Potential for lower tax rates compared to sole trade businesses, depending on your turnover  
  • Limited liability protection if debts or losses occur in the business 

Disadvantages of a Limited Company include:

  • Complicated paperwork and processes to set up and maintain your company 
  • Detailed financial records must be kept at all times, including filing annual accounts with Companies House 
  • Additional costs associated with VAT registration and Accountants’ fees  

Umbrella Company

An Umbrella Company is an organisation that provides a legal structure for self-employed contractors, allowing them to work as employees of the umbrella company and receive payment on their behalf. The umbrella company will then take care of all tax and national insurance contributions, paying these directly to HMRC after deducting a fee from the contractor’s pay.

Advantages of an Umbrella Company include:

  • Simplified tax and National Insurance payments as they are taken care of by the umbrella company 
  • Access to employee benefits such as pensions, holiday pay, and sick leave 
  • Professional standards necessary for getting contracts with larger firms 
  • Easier to set up than a limited company 

Disadvantages of an Umbrella Company include:

  • Limited control over your finances due to the umbrella company taking care of taxes and NI payments 
  • You may have a lower rate of take-home pay compared to a sole trader or limited company, as you will need to pay umbrella fees and taxes 
  • You may be subject to additional costs associated with professional indemnity insurance and other similar services. 

Choosing the right business structure for your needs can be a difficult decision, as each one has its own pros and cons. It is best to speak with an accountant or financial advisor to ensure you are making the right choice for your business. 

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