Choosing a business structure affects personal responsibility, tax, administration and how the business can raise finance. The appropriate choice depends on individual circumstances and may need to be revisited as the business develops. Here are four common pitfalls and ways to address them.
1. Choosing an unsuitable business structure
The risk: A structure that does not fit the business can create unexpected personal exposure, costs or administrative obligations.
What to do: Compare the main options before deciding. A sole trader operates personally and is generally responsible for business debts. In an ordinary partnership, partners can be personally responsible for partnership obligations. A limited liability partnership (LLP) is a separate legal entity with filing and reporting requirements; members’ liability is generally limited, subject to exceptions. A limited company is also a separate legal entity, but directors have legal duties and limited liability does not protect against every personal obligation, such as a personal guarantee. Tax treatment and administration differ between structures. Seek tailored accounting and legal advice where appropriate.
For further guidance on planning a business, read our Business Planning and Strategy article.
2. Missing registrations and notifications
The risk: Failure to register or notify the relevant authority when required can delay trading or lead to penalties.
What to do: Check the registrations relevant to the structure and activities. Sole traders generally need to register for Self Assessment when the applicable conditions are met; partnerships normally need to register with HMRC and appoint a nominated partner, with partners also meeting their individual obligations. Companies and LLPs are incorporated at Companies House and have ongoing filing duties. A company must also deal with its Corporation Tax position with HMRC. Check whether VAT registration is required based on taxable turnover and the applicable rules, and whether PAYE registration, sector-specific licences or local authority permissions are needed. Requirements and thresholds can change, so check current guidance.
3. Overlooking tax and record-keeping responsibilities
The risk: Confusing business turnover with profit, failing to keep adequate records or missing deadlines can lead to unexpected liabilities and penalties.
What to do: Identify which taxes apply. Sole traders and individual partners are generally taxed on their share of taxable business profits, while companies are subject to Corporation Tax on taxable profits. VAT, PAYE and National Insurance obligations depend on the circumstances. Keep business records, separate personal and business transactions where appropriate, plan for tax payments and review filing deadlines. Check whether Making Tax Digital requirements apply to the business.
For practical guidance on maintaining financial records, see our Bookkeeping Basics guide.
4. Treating legal compliance as a one-off task
The risk: Obligations may change when the business employs people, processes personal data, changes premises or expands its activities.
What to do: Review relevant employment, health and safety, consumer, data protection and industry-specific obligations as the business grows. UK data protection requirements may apply when handling personal information. Employers should consider contracts or written particulars, pay, pensions and workplace obligations. Use qualified legal or specialist advice for matters outside accountancy and tax.
For further information about payroll responsibilities, read our Payroll Management guide.
Keeping the structure under review
A structure that works at launch may not remain suitable. Reconsider the position when profits, ownership, financing or risk change, and assess the practical and tax consequences before making a change.
How an accountant can help
An accountant can help compare accounting and tax implications, explain record-keeping and filing obligations, and plan for tax payments. Company formation, partnership agreements and other legal matters may require advice from a solicitor.
Johnson Accountants supports UK businesses with accounting, tax and financial reporting services. Contact us to discuss the accounting and tax considerations relevant to your business.
Find out more about our accountancy and tax services or book a meeting with Johnson Accountants to discuss your requirements.
This article provides general information and is not a substitute for advice based on your individual circumstances.
