Your Money and Your Business

1. Structuring Your Business

The legal form of your business will affect your financial position.

1.1 Unincorporated businesses - sole traders, partnerships and limited liability partnerships - give you the flexibility to withdraw funds for personal use at any time.

• Profits are mainly taxed as income in unincorporated businesses. They are good if you do not want to retain profits in the business, and just want an income and some kind of pension.
• National Insurance contributions are generally lower than if you were an employee of a limited company.
• Sole traders and members of a partnership have unlimited liability for business debts.
• As the name suggests, a limited liability partnership (LLP) lets you limit your liability. While strictly a corporate vehicle with legal requirements similar to those of a limited company, an LLP is generally taxed as an unincorporated business.
• Partnerships are flexible arrangements which make it easy to share high levels of profits between family members. You do not have to justify a spouse or civil partner's level of remuneration to the HM Revenue & Customs as you would if they were employed by a limited company.

1.2 If you want to retain profits and build capital value in the business, forming a limited company (incorporation) is the right option.

• Corporation tax payable on a company's profits will generally be lower than comparable income tax liabilities.
• You can pay yourself a combination of salary and dividends - which are free of National Insurance contributions (see 3.2).
• All dividend payments (except those to companies) are now subject to corporation tax of at least 20 per cent. But shareholding employees in companies with profits of up to £300,000 will still pay less tax and NI on dividends than they would on the same amount paid to them as wages.
• The settlements legislation aims to prevent an individual from gaining a tax advantage by making arrangements which divert his or her income to another person who is liable at a lower rate of tax or is not liable at all. HM Revenue & Customs has become more vigorous in applying the legislation to incorporations. Get advice if this affects you.
• You may have to incur extra costs such as for audits and filing requirements at Companies House. By filing accounts, you are making information publicly available which would otherwise be private.