Choosing a trading structure

This section contains some papers designed to provide background in the legal structures available for business and enterprise in the UK.

Deciding which structure is most appropriate can be difficult and complex as each legal structure represents a compromise between benefits, risks and obligations; indeed over time the best structure for a particular business may change. Whilst the papers provide some insight into the issues, there is no substitute for seeking advice about your particular and unique circumstances.

Liberty Accounts strongly recommend that you talk to your Accountant (or other professional advisor) before making any significant decisions.

Sole Trader

What is a Sole Trader?

A sole trader is a business activity undertaken by a private individual. This could range from providing a service as an electrician to providing management consultancy. Setting up business as a sole trader is the quickest and easiest way of starting a business.

In essence you declare that you are a sole trader and start trading.

Obligation No. 1

You must inform Revenue and Customs within 3 months of becoming self-employed; as always with Government, there are penalties for failing to inform them.

It is a simple process, either go to the web site below or telephone your local tax office. www.hmrc.gov.uk

From the date you become self-employed you have to pay class 2 national insurance. This is a fixed amount regardless of the business profitability and it is usually paid weekly. See Tax Rates and Limits elsewhere in the ESA for current levels.

Because it is such an easy process, being a sole trader means that you as both a private person and a business person are viewed as one and the same for;

  • Tax and national insurance charges
  • Any debts you incur

This means that you are personally liable for all your debts both as a private person and a business person and all your assets (house, car, tools etc.) are potentially at risk.

Obligation No. 2

You will need to file a self-assessment income tax return each tax year. The income tax year runs from the 6th April to the 5th April following. It is probable that Revenue and Customs will send you a self assessment form automatically. If they do not, you still have an obligation to pay tax so you would need to let them know.

For more information look at www.hmrc.gov.uk/individuals/tmaself-assessment.shtml

As a sole trader, other than providing details of your trading activities in your self-assessment to Revenue and Customs, you do not have to tell anyone else about the financial performance of your business. That is unless you agree to, and this is commonly the situation with say your bank (especially if you borrow from them), your mortgage lender (to show you can repay the mortgage) and perhaps your accountant if they are to prepare your self-assessment and trading accounts.

VAT

If or when the turnover of your business (the value of your sales to your customers) exceeds a particular level, you may need to register for VAT purposes. The registration level varies from time to time (usually at the time of a budget) so see Tax Rates and Limits elsewhere in the ESA for current levels, or go to the Revenue and Customs site at www.hmrc.gov.uk/businesses/ and click on VAT.

Operating VAT should not be treated trivially and a full discussion with your professional advisor is strongly recommended. The operation of vat is in principle simple:

  • On sales to your customers you charge and collect VAT – OUTPUT TAX
  • Deduct the VAT you have been charged by your suppliers – INPUT TAX
  • You pay to or receive from HM Revenue and Customs the difference

Unfortunately the actual operation of VAT is more complex. Businesses are obliged to cope with multiple rates of VAT, exempt supplies, rules for trading with European Union as well as other imports and exports. VAT on certain types of business expenses cannot be recovered as input tax. The most common approach is to use the standard VAT scheme; however HM Revenue and Customs allow some special schemes i.e.

  • Cash Basis Scheme
  • Flat Rate Scheme
  • Annual Scheme

For the standard scheme VAT is accounted at the tax point date shown on invoices raised or received.

The Cash Accounting Scheme allows you to account for VAT on the basis of cash amounts actually received or paid out.

The Flat Rate scheme relieves that business of having to record the VAT on every individual sale and purchase transaction, but allows the VAT payable to be calculated as an agreed percentage of the VAT inclusive turnover. The business is still required to provide VAT invoices to all its customers.

Certain conditions must be fulfilled before you can use the Cash Accounting or Flat Rate schemes, please check with your Professional Advisor before making a decision.

VAT returns are required to be sent to HM Revenue and Customs periodically. The most common is quarterly, however in special circumstances monthly returns can be filed or a single annual return (Annual Scheme). Note that the Annual scheme does not mean you only make a VAT payment once a year, an agreed amount is paid quarterly and the final payment must reflect any correction to come to the amount shown on the annual return.

Again proper advice should be sought before moving to one of the schemes.

Employing People

As a sole trader you can employ people. You will need to inform Revenue and Customs that you are doing so. A helpful web site is https://www.hmrc.gov.uk/payerti/employee-starting/new-employee.htm

Legislation with respect to the obligations and relationship between Employer and Employee has been growing considerably over the last years. An employee must have a signed contract of employment; proper care must be taken to ensure there is a safe and healthy place of work and that the employee is properly trained in working safely. It is good practice and commonly expected to have in place an induction program for a new employee as well as an appraisal process linked into development and training programs. A good place to get some advice in this area as well as other business support is the Government web site www.gov.uk/browse/business

Business Plans and Cash Flow

Just as with any business it is wise for a sole trader to ensure that there is a plan before starting trading, after all you are moving from employment with a regular income, to an income based upon when your customers pay you and having perhaps already paid amounts to your suppliers or incurred debts to them.

A business plan and a cash flow forecast are essential.

A business plan is a blue print for your business, and should layout how you will achieve your business goals. It is sometimes seen as something only to be written if seeking finance and whilst it is fundamental to that process it is also fundamental to keeping your business going in the direction you wish. It does not necessarily have to be a lengthy document, as long as it conveys what you are doing and how you are going about it. There is much help available in preparing business plans and a good place to start may be talking to your bank. But to help you think through the issues go to  the section: Starting and Running a Business of this web site and perhaps use the downloadable tool.

A cash flow forecast deals with knowing when you will receive cash and when you will need to pay out cash and when you might need to find additional cash to keep going.

IT IS VITAL; again your Accountant, professional advisor or bank can help, but you can look at our Cash Flow Forecast in the Starting and Running a Business section and even use the tool provided.

Tax and National Insurance for Sole Traders

Income from a sole trader’s business activity is subject to income tax. Just as when in employment, a personal allowance for tax-free income is available. In addition to the fixed class 2 national insurance, a further class 4 national insurance charge is applied as a percentage of the taxable profits.

Where the Sole Trader employs people, then the Sole Trader must operate PAYE (pay as you earn system); deducting at source the Income tax and national insurance its employees owe and paying them over to HM Revenue and Customs. Employee costs are deducted as business expenses and this includes the employer’s contribution to national insurance for all employees.

Taxable profits basically are calculated by deducting business expenses from the sales income. However the calculation details of particular sole traders taxable profits are unique and assistance from a professional advisor is recommended.

Limited Company

A very common legal structure for businesses in the UK is the Limited Company, identified by the nomenclature of “Limited”, “Ltd.” or “PLC” at the end of the company name. A company is recognised in law as being a “legal person”, it can be sued and it can sue and has responsibilities under the law as if it were a private person.

The majority of companies are private; with the name ending “Limited” or “Ltd.” This means that shares in the company cannot be offered to the public. A public company’s name ends with “plc” or “public limited company” and its shares can be traded publicly. There are differing levels of obligations for private companies from public companies.

Why form a Limited Company?

The option to form a Limited Company is often taken by a business as they start to grow for one very strong reason; it offers the owners of the business (the Shareholders) protection of personal assets (House, savings, investments etc) from creditors of the company. This is known as limited liability.

There is also a notion of status or gravitas; the public tend to assume (sometimes erroneously) that a company is in some way a more reliable trading partner.

When a business is growing rapidly and further investments are needed, forming a company is a convenient vehicle to bring in other investors. For their cash investments they receive shares in the company.

There may be taxation reasons for forming a company although expert advice should be sought to ensure things turnout as expected.

The protection of trading names may be an additional reason to form a company with that name.

Banks will sometimes prefer to lend to a company particularly if they can take a charge over the assets of the company as security for the loan. It is in this area that in practice for many new companies limited liability is ineffective; banks or other lenders may insist on personal guarantees from Directors of the company. Limited Liability may also not protect Directors if they allow they company to trade whilst knowing it is insolvent or trade in a knowingly fraudulent manner.

The very advantageous benefits of trading as a company do not come without a cost; there are serious obligations to periodically provide information about the state of the company, and this information is in the public domain.

Forming a Company

In essence an individual person or a group of individuals agree to form a company. The participants also agree to provide some funds to the company in return for a proportionate stake in the company. These funds are usually known as equity investment, and for most companies the participating individuals receive share certificates in return and are therefore known as shareholders. Another way of structuring a company’s ownership is limited by guarantee, but issuing shares is by far and away the most common.

So having identified potential shareholders (Note that private companies can not offer shares to the public) and agreed the individual equity investment amounts; the legal process is summarised as follows:

  • Submit Documents and Fee to Companies House
    • Prepare a Memorandum of Association
    • Prepare the Articles of Association
    • Complete Form 10 – Identifying the initial Directors, Company Secretary and the Registered Office.
    • Complete Form 12 – A Declaration on Application
  • Registrar of Companies Issues Certificate of Incorporation
  • Hold the First Board Meeting

The Memorandum of Association

All companies must have a Memorandum of Association that must deal with the following matters.

The Company Name

The name of the company must be given, including the ending of Ltd. or Limited (or the Welsh equivalent). Companies House will refuse a name if the name is already in use, if it is offensive or contains “sensitive” words, such as Royal, Crown etc. A name which is similar to an existing name, may not be refused registration, but the other company could object to The Secretary of State for Trade and Industry and ask for the new name to be changed, or the other Company may bring a “passing off” legal action in the Courts to seek a change and perhaps damages if it has been negatively impacted. A Company name may be changed by a special resolution of its shareholders.

Domicile

The location of the Registered Office of the Company must be stated, either England and Wales, Scotland or Northern Ireland. It is also possible to state that the domicile is Wales (rather than England and Wales) allowing for some documents to be delivered in Welsh language. A domicile cannot be changed.

The Objects and Powers

A company must state its Objects – the reason for its existence, the activities it will undertake. Additionally it must list its Powers, such as the power to borrow money, sell parts of its business, or buy a new business. This can be an important area and if unusual transactions are contemplated by a business it is good practice to check the Objects and Powers clauses before hand. The Objects and Powers may be changed by a special resolution of the shareholders.

Statement of Liability

Every company must state that the liability of the shareholders of the Company is limited.

Authorised Share Capital

The amount of the authorised share capital must be stated. It is usual for the Authorised amount to be greater then the amount initially to be issued, to allow for further issues in the future. The statement must give the number of the shares and the nominal (par) value of each share i.e. 1000 shares of £1.00 or 4000 shares of £0.25 . Authorised share capital can be increased by an ordinary resolution. A private company can exist with a single share issued to the only shareholder; provided a company secretary (who is not that person) also exists.

The Articles of Association

All companies must have Articles of Association that deal with the rules and regulations of the company, and particularly how shareholders and directors will interact. The shareholders agree the articles. It is usual to take as a basis what is known as Table A from The Companies Act 1985. This is a pro-forma set of rules and regulations that can be modified by the shareholders to suit their needs. The Articles may be changed by a special resolution of the shareholders.

Form 10 – the First Directors and Secretary and Intended situation of the Registered Office

This form gives the names, addresses and consent of the first Director(s) of the Company as well as the Company Secretary. Note that in the case of a single Director company, the secretary must be a different person. Subsequent changes or additions to Directors and Secretaries must be notified to Companies House on specific forms (288a for appointments, 288b for resignations and 288c for changes of personal details) within 14 days of appointment or change.

The registered office of a company is the address to which legal documents can be served. It can be the address of the business, it can be an accommodation address, and often it is the address of the Company’s accountants or solicitors. The address must appear on all business letters and order forms.

Form 12 – The Declaration

A Director must give a declaration on this form that all aspects of the Companies Act 1985 with respect to registration have been complied with.

Certificate of Incorporation

The Company comes into existence when Companies House issues the Certificate of Incorporation. The certificate states:

  • The Company Name
  • Date of Incorporation
  • A unique company number

Trading as a company can commence from the date of incorporation. Any transactions entered into before that date is the personal responsibility of the person making them, not the company.

Hold the First Board Meeting

A first board meeting after incorporation should be held to deal with some administrative issues, such as the Directors agreeing to open a bank account and who will be signatories, agreeing responsibilities, agreeing contracts of employment etc. Things that need to be in-place to before trading starts.

Companies House provide a very helpful web site giving more details on forming a company as well as responsibilities of Directors and Secretaries at www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml

Key Obligations for a Company

Registers

A private company must keep the following registers:

  • Register of directors
  • Register of secretaries
  • Register of shareholders
  • Register of directors’ interests in shares
  • Register of charges (mortgages) of the company

Annual General Meeting

Unless there has been an elective resolution to dispense with an AGM, one must be held within 18 months of incorporation and then one every calendar year, with no more than a 15 month gap. Minutes must be kept.

Annual Return

Each year the annual return must be filed with Companies House. It sets out information on the share capital, shareholders, directors and secretary of the company.

Filing Statutory Accounts

A company is obliged to file a set of statutory accounts with Companies House each year. These accounts are in the public domain and can be inspected by any one with an interest. The format of the accounts is determined by The Companies Acts and can vary depending on the size and circumstances of the company. Smaller companies have less onerous obligations than larger ones; additionally smaller companies can have an exemption from having an independent audit
It is strongly advised that professional advice is sought in preparing statutory accounts and in determining the appropriate accounting periods and dates.

Informing Revenue and Customs

You are obliged to inform HM Revenue and Customs as soon as the company exists (incorporated) by contacting your local tax office. They may well send a form requesting additional information. The company is required to file a self-assessment corporation tax form at the end of its financial year.

Again it is strongly advised that professional advice is sought in preparing this return which is known as the CT600 return.

The Revenue and Customs web site provides additional information at www.hmrc.gov.uk/businesses

VAT

If or when the turnover of the Company (the value of your sales to your customers) exceeds a particular level, you may need to register for VAT purposes. The registration level varies from time to time (usually at the time of a budget) so see Tax Rates and Limits elsewhere in the ESA for current levels, or go to the Revenue and Customs site at www.hmrc.gov.uk/businesses and click on VAT. Operating VAT should not be treated trivially and a full discussion with your professional advisor is strongly recommended.

The operation of vat is in principle simple:

  • On sales to your customers you charge and collect VAT – OUTPUT TAX
  • Deduct the VAT you have been charged by your suppliers – INPUT TAX
  • You pay to or receive from HM Revenue and Customs the difference

Unfortunately the actual operation of VAT is more complex. Businesses are obliged to cope with multiple rates of VAT, exempt supplies, rules for trading with European Union as well as other imports and exports. VAT on certain types of business expenses cannot be recovered as input tax. The most common approach is to use the standard VAT scheme; however HM Revenue and Customs allow some special schemes i.e.

  • Cash Basis Scheme
  • Flat Rate Scheme
  • Annual Scheme

For the standard scheme VAT is accounted at the tax point date shown on invoices raised or received.

The Cash Accounting Scheme allows you to account for VAT on the basis of cash amounts actually received or paid out.

The Flat Rate scheme relieves that business of having to record the VAT on every individual sale and purchase transaction, but allows the VAT payable to be calculated as an agreed percentage of the VAT inclusive turnover. The business is still required to provide VAT invoices to all its customers.

Certain conditions must be fulfilled before you can use the Cash Accounting or Flat Rate schemes, please check with your Professional Advisor before making a decision. VAT returns are required to be sent to HM Revenue and Customs periodically. The most common is quarterly, however in special circumstances monthly returns can be filed or a single annual return (Annual Scheme). Note that the Annual scheme does not mean you only make a VAT payment once a year, an agreed amount is paid quarterly and the final payment must reflect any correction to come to the amount shown on the annual return.

Again proper advice should be sought before moving to one of the schemes.

Employing People

A company can employ people; you will need to inform Revenue and Customs that you are doing so. A helpful web site is www.hmrc.gov.uk/employers/first_steps.htm Legislation with respect to the obligations and relationship between Employer and Employee has been growing considerably over the last years. An employee must have a signed contract of employment; proper care must be taken to ensure there is a safe and healthy place of work and that the employee is properly trained in working safely. It is good practice and commonly expected to have in place an induction program for a new employee as well as an appraisal process linked into development and training programs. A good place to get some advice in this area as well as other business support is the local Business Link office or the Business Link web site www.businesslink.gov.uk/

Business Plans and Cash Flow

Just as with any business it is wise for a Company to ensure that there is a plan before starting trading, you will need to understand when your customers will be paying you and when you will need to be paying the suppliers. A business plan and a cash flow forecast are essential. A business plan is a blue print for your business, and should layout how the company will achieve its business goals. It is sometimes seen as something only to be written if seeking finance and whilst it is fundamental to that process it is also fundamental to keeping your business going in the direction you wish. It does not necessarily have to be a lengthy document, as long as it conveys what the company is doing and how it is going about it. There is much help available in preparing business plans and a good place to start may be talking to your bank. But to help you think through the issues go to the Business Planning section of the ESA and perhaps use the downloadable tool.

A cash flow forecast deals with knowing when you will receive cash and when you will need to pay out cash and when you might need to find additional cash to keep going. IT IS VITAL. Again your professional advisor or bank can help, but you can look at our Cash Flow Forecast section of the EAS and even use the tool provided.

Tax and National Insurance

Aside from VAT there are two other main types of taxation a company must deal with, Corporation Tax and Income Tax.

Taxable profits from a Company are subject to Corporation Tax. Taxable profits basically are calculated by deducting business expenses from the sales income.

Where the Company employees people, then the Company must operate PAYE (pay as you earn system); deducting at source the Income tax and national insurance its employees owe and paying them over to HM Revenue and Customs. Employee costs are deducted as business expenses and this includes the employer’s contribution to national insurance for all employees.

Residual income after Corporation tax can be paid out in the form of Dividends to shareholders, subject to certain regulations specified in the Companies Acts. Dividend income in the hands of the shareholder can come with advantages, particularly as no national insurance is payable. Smaller companies, especially ones with a single shareholder have taken advantage of this; however there are some particular potential pitfalls that need to be watched. IR35 regulations can impact those that contract to use their personal skills (IT Developers, Web designers) and if HM Revenue and Customs feel the Company is not really taking trading risks, then an imputed income tax and national insurance is imposed on the shareholder.

It must be stressed that taxation can be a complex and time consuming area; it is strongly advised appropriate professional advice is taken.

Shareholders Agreement

When more than two shareholders exist it is common and good practice to have a shareholders agreement. This is a legal agreement between the shareholders setting out how the company will be managed and run and the relationship and influences between the shareholders themselves.

Many things can be put into the agreement and they potentially can have impacts both in law and in taxation. It is wise therefore is use a properly qualified professional advisor to supervise and draw up the agreement.

Partnerships

What is a Partnership?

In simple terms a partnership is a structure in which several individuals agree to work together, and tell all those that will interface with them (customers, suppliers etc) that they are a partnership. In essence it is similar to a sole trader business except that there are multiple proprietors.

As with a sole trader the private and business affairs of the partners are not separable.

A partnership is usually formed because there is a need for more than one person’s skills; be they the same or complementary. Setting up business as a partnership is quick and easy.

In essence you declare that you are a partnership and start trading.

Obligation No. 1

All partners must inform Revenue and Customs within 3 months of becoming self-employed; as always with Government, there are penalties for failing to inform them.

It is a simple process, either go to the web site below or telephone your local tax office. www.hmrc.gov.uk/startingup/index.htm

From the date you become self-employed you have to pay class 2 national insurance. This is a fixed amount regardless of the business profitability and it is usually paid weekly. See Tax Rates and Limits elsewhere in the ESA for current levels.

Because it is such an easy process, being a partnership means that the partners as private people and the partners as business persons are seen as one and the same for

  • Tax and national insurance charges
  • Any debts you incur

This means that partners are personally liable for all partnership debts and the private assets (house, car, tools etc) of the partners are potentially at risk.

Obligation No. 2

Partners will need to file individual self-assessment income tax returns each tax year. The income tax year runs from the 6th April to the 5th April following. It is probable that Revenue and Customs will send self-assessment forms automatically. If they do not, there is still an obligation to pay tax so you would need to let them know. The following site is useful www.hmrc.gov.uk/individuals/tmaself-assessment.shtml

As a partnership other than providing details of the trading activities in your self-assessment to Revenue and Customs, there is no requirement to tell anyone else about the financial performance of the business. That is unless you agree to, and this is commonly the situation with say the bank (especially if the partnership borrows from them), a mortgage lender (to show you can repay the mortgage) and perhaps your accountant if they are to prepare your self-assessment and trading accounts.

A partnership exists whilst all the partners are in it. If there is a change of partners then in effect there is a new business. However individual partner’s income tax situation may not change.

VAT

If or when the turnover of your business (the value of your sales to your customers) exceeds a particular level, you may need to register for VAT purposes. The registration level varies from time to time (usually at the time of a budget) so see Tax Rates and Limits elsewhere in the ESA for current levels, or go to the Revenue and Customs site at https://www.hmrc.gov.uk/businesses/ and click on VAT.

Operating VAT should not be treated trivially and a full discussion with your professional advisor is strongly recommended. The operation of vat is in principle simple:

  • On sales to your customers you charge and collect VAT – OUTPUT TAX
  • Deduct the VAT you have been charged by your suppliers – INPUT TAX
  • You pay to or receive from HM Revenue and Customs the difference

Unfortunately the actual operation of VAT is more complex. Businesses are obliged to cope with multiple rates of VAT, exempt supplies, rules for trading with European Union as well as other imports and exports. VAT on certain types of business expenses cannot be recovered as input tax. The most common approach is to use the standard VAT scheme; however HM Revenue and Customs allow some special schemes i.e.

  • Cash Basis Scheme
  • Flat Rate Scheme
  • Annual Scheme

For the standard scheme VAT is accounted at the tax point date shown on invoices raised or received.

The Cash Accounting Scheme allows you to account for VAT on the basis of cash amounts actually received or paid out.

The Flat Rate scheme relieves that business of having to record the VAT on every individual sale and purchase transaction, but allows the VAT payable to be calculated as an agreed percentage of the VAT inclusive turnover. The business is still required to provide VAT invoices to all its customers.

Certain conditions must be fulfilled before you can use the Cash Accounting or Flat Rate schemes, please check with your Professional Advisor before making a decision.

VAT returns are required to be sent to HM Revenue and Customs periodically. The most common is quarterly, however in special circumstances monthly returns can be filed or a single annual return (Annual Scheme). Note that the Annual scheme does not mean you only make a VAT payment once a year, an agreed amount is paid quarterly and the final payment must reflect any correction to come to the amount shown on the annual return.

Again proper advice should be sought before moving to one of the schemes.

Employing People

As a partnership you can employ people, you will need to inform Revenue and Customs that you are doing so. A helpful web site is https://www.hmrc.gov.uk/employers/index.shtml

Legislation with respect to the obligations and relationship between Employer and Employee has been growing considerably over the last years. An employee must have a signed contract of employment; proper care must be taken to ensure there is a safe and healthy place of work and that the employee is properly trained in working safely. It is good practice and commonly expected to have in place an induction program for a new employee as well as an appraisal process linked into development and training programs. A good place to get some advice in this area as well as other business support is the local Business Link office or the Business Link web site https://www.businesslink.gov.uk/

Business Plans and Cash Flow

Just as with any business it is wise for a partnership to ensure that there is a plan before starting trading, after all the partners may be moving from employment with a regular income, to an income based upon when customers pay and having perhaps already paid amounts to suppliers or incurred debts to them.

A business plan and a cash flow forecast are essential.

A business plan is a blue print for your business, and should layout how you will achieve your business goals. It is sometimes seen as something only to be written if seeking finance and whilst it is fundamental to that process it is also fundamental to keeping your business going in the direction you wish. It does not necessarily have to be a lengthy document, as long as it conveys what you are doing and how you are going about it. There is much help available in preparing business plans and a good place to start may be talking to your bank. But to help you think through the issues go to the Business Planning section of the ESA and perhaps use the downloadable tool.

A cash flow forecast deals with knowing when you will receive cash and when you will need to pay out cash and when you might need to find additional cash to keep going. IT IS VITAL; again your Accountant, professional advisor or bank can help, but you can look at our Cash Flow Forecast section of the EAS and even use the tool provided.

Tax and National Insurance for Partnerships

Income from a partnerships business activity will be divided between the partners in an agreed manner. Each partner is then subject to income tax. Just as when in employment, a personal allowance for tax-free income is available. In addition to the fixed class 2 national insurance, a further class 4 national insurance charge is applied as a percentage of the taxable profits.

Where the partnership employs people, then the partnership must operate PAYE (pay as you earn system); deducting at source the Income tax and national insurance its employees owe and paying them over to HM Revenue and Customs. Employee costs are deducted as business expenses and this includes the employer’s contribution to national insurance for all employees.

Taxable profits basically are calculated by deducting business expenses from the sales income. However the calculation details of particular partnerships taxable profits are unique and assistance from a professional advisor is recommended.

Limited Liability Partnerships [LLP’s]

What is a LLP?

In simple terms a LLP (Limited Liability Partnership) is a structure in which several individuals agree to work together, and tell all those that will interface with them (customers, suppliers etc) that they are a limited liability partnership.

The key difference between a partnership and a LLP is that provided certain obligations are fulfilled the members’ liabililites (Note that participants in a LLP are known as members rather than partners) can be limited to their contributions to the LLP and personal assets are protected. Unlike a sole trader or partners in a partnership the private and business affairs of the partners are separable; the LLP in an independent legal entity.

A limited liability partnership is usually formed because there is a need for more than one person’s skills; be they the same or complementary. Setting up business as a limited liability partnership is similar to setting up a company, and is not as easy as a simple partnership.

See below on Forming an LLP

Obligation No. 1

All members must inform Revenue and Customs within 3 months of becoming self employed; as always with Government, there are penalties for failing to inform them.

It is a simple process, either go to the web site below or telephone your local tax office. www.hmrc.gov.uk/startingup/index.htm

From the date you become self-employed you have to pay class 2 national insurance. This is a fixed amount regardless of the business profitability and it is usually paid weekly. See Tax Rates and Limits elsewhere in the ESA for current levels.

Being a limited liability partnership means that members as private people and the members as business persons are seen as one and the same for tax and national insurance charges.

Obligation No. 2

Members will need to file individual self-assessment income tax returns each tax year. The income tax year runs from the 6th April to the 5th April following. It is probable that Revenue and Customs will send self-assessment forms automatically, If they do not, there is still an obligation to pay tax so you would need to let them know. The following site is useful:www.hmrc.gov.uk/individuals/tmaself-assessment.shtml

LLP trading details and accounts must be filed with Companies House (much like a Company) in addition to each member completing an income tax self-assessment to Revenue and Customs.

Forming a LLP?

An LLP is an incorporated entity (like a company), and has to be registered with Companies House. To be formed, at least two persons must agree to carry on a business with a view to profit and put their names on an incorporation document. Unlike a company a LLP does not have any share capital and does not need a memorandum and articles of association. The internal affairs of a LLP are usually agreed in a member’s agreement entered into as the LLP is formed.

It is vital to consult a professional advisor when drawing up a member’s agreement.

A form LLP2 must be completed and sent to Companies House (naturally with a registration fee). This form must identify at least two members who will be “designated members”, who have obligations similar to those of a company secretary. The form can be obtained from Companies House (See the web site below).  The Registrar of Companies will issue a certificate of incorporation of the LLP.

Changes to members need to be submitted to Companies House using form LLP288a for new members and LLP288b for terminations.

Just as for a company there is an obligation for a LLP to keep accounting records and file accounts. The accounts will be in public domain. It is thoroughly recommended appropriate advice is sought from a professional advisor in dealing with this area.

Companies House provide a very helpful web site giving more details on forming a LLP as well as responsibilities of Designated Members at www.companieshouse.gov.uk/infoAndGuide/llp.shtml

VAT

If or when the turnover of your business (the value of your sales to your customers) exceeds a particular level, you may need to register for VAT purposes. The registration level varies from time to time (usually at the time of a budget) so see Tax Rates and Limits elsewhere in the ESA for current levels, or go to the Revenue and Customs site atwww.hmrc.gov.uk/businesses/ and click on VAT.

Operating VAT should not be treated trivially and a full discussion with your professional advisor is strongly recommended. The operation of vat is in principle simple:

  • On sales to your customers you charge and collect VAT – OUTPUT TAX
  • Deduct the VAT you have been charged by your suppliers – INPUT TAX
  • You pay to or receive from HM Revenue and Customs the difference

Unfortunately the actual operation of VAT is more complex. Businesses are obliged to cope with multiple rates of VAT, exempt supplies, rules for trading with European Union as well as other imports and exports. VAT on certain types of business expenses cannot be recovered as input tax. The most common approach is to use the standard VAT scheme; however HM Revenue and Customs allow some special schemes i.e.

  • Cash Basis Scheme
  • Flat Rate Scheme
  • Annual Scheme

For the standard scheme VAT is accounted at the tax point date shown on invoices raised or received.

The Cash Accounting Scheme allows you to account for VAT on the basis of cash amounts actually received or paid out.

The Flat Rate scheme relieves that business of having to record the VAT on every individual sale and purchase transaction, but allows the VAT payable to be calculated as an agreed percentage of the VAT inclusive turnover. The business is still required to provide VAT invoices to all its customers.

Certain conditions must be fulfilled before you can use the Cash Accounting or Flat Rate schemes, please check with your Professional Advisor before making a decision.

VAT returns are required to be sent to HM Revenue and Customs periodically. The most common is quarterly, however in special circumstances monthly returns can be filed or a single annual return (Annual Scheme). Note that the Annual scheme does not mean you only make a VAT payment once a year, an agreed amount is paid quarterly and the final payment must reflect any correction to come to the amount shown on the annual return.

Again proper advice should be sought before moving to one of the schemes.

Employing People

As a limited liability partnership you can employ people, you will need to inform Revenue and Customs that you are doing so. A helpful web site iswww.hmrc.gov.uk/employers/first_steps.htm

Legislation with respect to the obligations and relationship between Employer and Employee has been growing considerably over the last years. All employees must have a signed contract of employment, proper care must be taken to ensure there is a safe and healthy place of work and that the employee is properly trained in working safely. It is good practice and commonly expected to have in place an induction program for a new employee as well as an appraisal process linked into development and training programs. A good place to get some advice in this area as well as other business support is the local Business Link office or the Business Link web site www.businesslink.gov.uk/

Business Plans and Cash Flow

Just as with any business it is wise for a limited liability partnership to ensure that there is a plan before starting trading, after all the members may be moving from employment with a regular income, to an income based upon when customers pay and having perhaps already paid amounts to suppliers or incurred debts to them.

A business plan and a cash flow forecast are essential.

A business plan is a blue print for your business, and should layout how you will achieve your business goals. It is sometimes seen as something only to be written if seeking finance and whilst it is fundamental to that process it is also fundamental to keeping your business going in the direction you wish. It does not necessarily have to be a lengthy document, as long as it conveys what you are doing and how you are going about it. There is much help available in preparing business plans and a good place to start may be talking to your bank. But to help you think through the issues go to the Business Planning section of the ESA and perhaps use the downloadable tool.

A cash flow forecast deals with knowing when you will receive cash and when you will need to pay out cash and when you might need to find additional cash to keep going. IT IS VITAL; again your Accountant, professional advisor or bank can help, but you can look at our Cash Flow Forecast section of the EAS and even use the tool provided.

Tax and National Insurance for Limited Liability Partnerships

Income from a limited liability partnership’s business activity will be divided between the members in an agreed manner. Each member is then subject to income tax. Just as when in employment, a personal allowance for tax-free income is available. In addition to the fixed class 2 national insurance, a further class 4 national insurance charge is applied as a percentage of the taxable profits.

Where the LLP employs people, then the LLP must operate PAYE (pay as you earn system); deducting at source the Income tax and national insurance its employees owe and paying them over to HM Revenue and Customs. Employee costs are deducted as business expenses and this includes the employer’s contribution to national insurance for all employees.

Taxable profits basically are calculated by deducting business expenses from the sales income. However the calculation details of particular partnerships taxable profits are unique and assistance from a professional advisor is recommended.

Legal Trading Structures:

Customer Quotes:
 
"Our accountant is happy with it, and the non - accountants have found it very easy to use too."

Gregory Bricusse – 020 London Directory

 


 

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