The start-up ecosystem in Scotland has grown exponentially in recent years. The Businesses in Scotland 2019 report shows that, as of March 2019, an estimated 356,550 private sector businesses operating in Scotland – the highest numbers since current records began. Choosing the correct business vehicle is critical to ensure the growth of your business. When determining what corporate structure is suitable, there is a lot to consider and the “one size fits all” approach does not work.
In choosing the business structure, you should consider how decisions you make now will affect the growth of your business. Generally, this thought process will start at a four-way crossroad - whether to trade as a sole trader, partnership, limited liability partnership or a private limited company.
Sole Trader
A sole trader is a simple form of business structure where the business is owned and operated by a single individual and there is no legal distinction between the owner and the business. This means that an owner’s personal wealth is not sheltered from liability in the business.
Partnership
A partnership, sometimes referred to as a general partnership, is a business relationship that subsists between two or more persons carrying on business in common with a view to profit. This is the simplest business vehicle to choose if two or more people are in partnership. It is very similar to the sole trader setup, but everything, including profits and losses, will be shared between the partners. This also means the owners’ personal wealth is not sheltered from liability in the business.
Limited Liability Partnerships
Limited liability partnerships (commonly known as LLPs) are generally most suited to professional service businesses. LLPs are a hybrid between a limited company and a partnership, in that it offers the limited liability of a company, but the tax regime and flexibility available to general partnerships. The liability of the partners is limited to their investment into the LLP and any personal guarantees they have given. The profit of the LLP is shared between the partners and is taxed as personal income. LLPs must go through a formal registration process with Companies House and a partnership agreement should be put in place to determine how profits are shared.
Limited Company
Generally, a limited company is the preferred structure for many start up’s as the advantages, in most cases, outweigh the disadvantages of incorporation. In terms of your business identity and brand, incorporation can often add credibility in the eyes of your customers, business equivalents and investors. Some advantages of this structure are as follows:
- it is simple and cheap to get your company incorporated and on the register at Companies House;
- a limited company has its own legal identity. So, third parties contract with the ‘company’ and not the individual directors and shareholders; and
- the shareholders have a limited or capped liability for the debts of the business.
So, when you’re thinking about which business structure to choose, you should take all factors into consideration, including liability, tax and administration. Making time for legal and tax advice at this stage can be invaluable in helping you to avoid leaking profits in the future or exposing yourself to a large and unplanned tax bill down the line.
