Tuesday, 16 October 2012

Business Structures

One of the questions to be resolved when setting up any small business is which structure is the most appropriate? There are a number of options including: self-employment; partnerships; limited liability partnerships; and limited companies. I’m going to look at the first and the last of these, as the two options that most independent writers would consider when putting their writing on a business footing.
Key points of self-employment (also called sole trading) in the UK are as follows:
  • There is no financial separation between the individual and business
  • There are no formal positions in the company
  • There is a need for registration with the tax authorities within 3 months of starting trading
  • Tax on earnings is paid through Self-assessment and National Insurance
  • Personal drawings (salary) are taken after tax has been deducted
Key points for a limited company in the UK are as follows:
  • The company is a separate business entity with finances separated from the individual
  • The company needs one or more directors plus a company secretary (although these can be the same person)
  • The company must be registered at Companies House (and annual returns must be made) plus tax authorities
  • Individuals are employees and are paid salaries from pre-tax profits (including Directors)
  • Individuals’ income tax is paid through the PAYE system
  • Dividends are paid after corporation tax deducted.
The advantages of self-employment include it being a cheaper option with less administration and benefits such as the availability of free banking. The disadvantages include the fact that all the assets (personal and business) are at risk and it may be more difficult to raise finances if required.
The advantages of a limited company include separation (and therefore some protection) of personal assets plus the possibility of an enhanced image with potential clients. The disadvantages include increased levels of administration and higher costs.
The choice that any writer makes on business structure will depend on their individual circumstances. I have run a limited company for twenty years, associated with other activities, and have simply added my writing to the mix. My systems are established and simple to operate; for me, it was the obvious choice. That would not necessarily be the obvious route for a new business.
Note: I write these articles as an experienced small business owner, hoping to clarify issues for writers starting down the journey towards running their own business and to help identify questions that need to be asked. I am neither a lawyer, nor an accountant. All the issues covered above can be complex (especially those relating to tax matters). ALWAYS take professional advice before deciding which route to take.

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