A business’s status in the market cannot be defined in a strict manner. However, there are certain parameters set by the professionals that help us define the importance, growth rate, and its significance in the market. These parameters are mere indicators that help us identify the position in market and one of these indicators is called business structures.
When one is setting out to launch their own business, it can be the most frightening decision they ever make. But, if executed properly, it can turn out and become the best decision ever. A downturn in the beginning must be perceived as a test; if one can rise off the ground and succeed in doing so, it shows that they have the strength to go on to even better things later.
However, in-order to maximize the chances of success for the business, numerous important decisions is to be made; and among those one is business structure.
There are three types of common business structures. Each of these types has its own qualities and so they must be wisely considered, because the profitability, productivity and success of the business rely heavily on the shoulders of the decision made.
Sole trader is the simplest of all structures. One doesn’t require registering with Companies House as well as there is no need to pay corporation tax. If the owner has not employed a workforce, paperwork would be greatly minimized a well. Financial responsibility though lies with the owner and owner would have annual tax returns to deal with.
The owner would also have legal responsibility for the business, which would leave him/her bare to much bigger risk compared to other structures, so a proper insurance policy is highly essential.
Partnerships are usually alike a sole trader structure – only they have comparatively more than one owner, and each partner could be independently accountable for the business’s total debt, if one partner leaves the partnership, for instance. A LLP which is the abbreviation for limited liability partnership offers extra security to individual partners as it basic idea is to limit liability to the amount each partner has capitalized in the business.
Partners will although have to get registered with Companies House and put required information on the public record if considering this decision, much similar to a limited company.
Sole traders and partnerships are also able to enjoy tax savings when considering providing benefits. Such as, providing themselves with a car concerning business travel is expected to be far more tax efficient in a partnership or sole proprietorship than via a limited company structure.
Limited companies tend to offer a different structure completely. Companies are required to be registered with Companies House and are liable to pay 20% corporation tax on revenues.
Workforce taxes (under PAYE) are also relevant, even though this is required where ever employees are employed in any structure. Considering the earned profits, corporation tax might offer a comparatively much better rate than income tax. The owner mostly has a choice of either to pay salary or set amount of dividends to themselves when considering this particular option. However, it is usually suitable to pay a salary of a sufficient amount, even though it is only to reserve your right to state profits and benefits.
Although, dividends might provide owners a very attractive tax rate compared with salaries, but alternatively, the owner does not meet the requirements for pension relief, so are tax-inefficient for developing the retirement pot.
The “S” Corporation
Perhaps the utmost common type of small-business Corporation is called an “S” corp. which guards its shareholders from the debts and liabilities of the corporation. It is managed by a selected board of directors who are elected by the shareholders and they are often either the company’s owners or officers. The immense advantage an S corp. possesses over a corporation (C corp.) is that the revenues or losses pass on to the shareholders straight away instead of being taxed twice, first as corporate dividends and then as personal revenue. Similar to a C corp., S corp. shareholders can generate money and sell away shares devoid of any problem. However, the only disadvantage is that the amount of shareholders is limited to 75 which is quite a likely problem if the company takes off and the owner decides to generate money via a public offering. So, in-order to become an S corp., the owner should file with the state in which they are incorporating the business, and then complete IRS Form 2553 to acquire S corp. status.
The “C” Corporation
A C corp. is quite similar to an S corp. except in two aspects:
- It is a taxable unit,
- Shareholders are not liable to company’s losses.
In this case, C corporations are rather larger companies who have thousands of shareholders and in numerous cases, publicly traded corporations. C corporations might also be considered a rather better option for business owners whose intention is to pay themselves lower salaries and then reinvest majority of the returns in the company.
Choosing the best business structure
“When launching a business, one need to choose a structure that particularly mirrors the financial, tax and administrative needs of the business. Considering to simply providing a consultancy service, for instance, a limited company can be worthlessly critical. Though, if one is looking to elevate capital to take the business to the next stage, a sole proprietor structure might not be the right choice”, according to Norman Bloom, the Tax Return Melbourne specialist in CTA with offices in USA and Australia.
However, businesses are so diverse that one cannot say that there is a hard and fast rule for what structure will be most appropriate and as the business develops, the aims change, and so the most suitable structure to employee will also change. So, keep evaluating your business as it develops since revising the structure might save you money in the future for long run.