How To Choose The Right Business Structure For Your Micro Business Expansion

Company structureExpansion can prove a considerable burden on your finances, a litany of funds often needed to fuel growth and ensure that your business is capable of coping with new capital outlays.

Regardless of whether you’re bootstrapping, or whether you’re actively seeking external investment, the structure of your business will have an impact upon the amount of funds at your disposal. So, with this mind, here’s an overview of the varying company structures, along with an outline of the financial and legal implications that adopting each will entail…

1.  Sole trader

Essentially, this is the simplest structure. Many micro businesses adopt this initially and some choose to maintain it. Mostly, because operating as a sole trader can be so much less complicated.

As a sole trader you won’t need to register with Companies House and you won’t need to pay corporation tax. While if you’re not running a payroll system, paperwork and red tape will be greatly reduced too. Bear in mind, you’ll still have yearly tax returns to contend with though.

All that said, as a sole trader you’re subject to unlimited liability, meaning that you’ll be personally liable for any of debts the business runs up. Bankruptcy can loom large should you not be able to meet your debts.

Elsewhere, sole traders often struggle to raise investment and borrow, something that isn’t too conductive to the expansion process.

2.  Partnership

A structure that’s similar to the sole trader option, alternatively, you might want to consider re-establishing as a partnership. This could work to bring further investment into your micro business whilst limiting liability on your part.

Partners will share in all aspects of the business – both in terms of any profits the partnership makes, but also in terms of liabilities – which are shared. There’s also the option of forming a ‘limited liability partnership’  which offers more protection to individual partners, as it limits liability to what each partner has invested in the business. Adopting this structure, you will need to register with Companies House though and put certain information on the public record (similar to a limited company).

If this is the route you opt for ensure that you’ve established some sort of partnership agreement. This should cover all the important issues such as how the business will be run, how the profits are to be split, and what the procedures will be if a dispute arises between partners.

3.  Limited company

As a burgeoning micro business, adopting the the limited company structure is something that’s well worth considering.

In contrast to operating as a sole trader and similar to the ‘limited liability partnership’ structure, this offers limited liability. You’re maximum losses can only be equal to what you put into the company in the first place.

Elsewhere, as a limited company you may be able to gain access to greater investment, as you can establish your own company credit rating against which to borrow money and issue shares as a way of raising funds. Banks, too, are generally more likely to lend to limited companies.

Getting into the real nitty gritty financial stuff, operating as an ltd, there’s the potential for greater profitability. Operating as a Sole Trader, you’ll be taxed on your income. This means you’ll end up paying Income Tax and National Insurance Contributions on everything you earn.

In contrast, operating through a Limited Company you’ll pay Corporation Tax of 20% (assuming that your profits are less than £300,000), whilst you can pay yourself through a combination of low wage (to minimise your PAYE and NIC outgoings) and dividends.  Ultimately, this will result in less of your money going to HMRC, meaning more of it can be used for your expansion plans.

Choosing the right structure for your expansion plans

Every micro business is different and there’s no definitive rule for what structure will and will not work best for you. As you guide your business through expansion and your aims change, the most appropriate structure to use will probably change too.

Ensure that you thoroughly assess your business not only before but during expansion, as reviewing and developing a new structure could save you money in the long run. Regularly cast an eye over the respective structures and decide which one will best suit you at that present time.

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Take some time today to figure out which structure will work best for you. You could try jotting down the pros and cons for each structure based around your particular perspective to help you get clear.

Mark James

Mark James is an in-house Writer for Crunch, accountants for contractors. He specialises in small business and has aspirations of his own start-up one day.

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Comments

  1. I’d go and check up with someone before you decide, as stopping being a limited company isn’t easy. I have a client who needs to do that, and that’s her expansion goal as the overheads and time burdens of running the limited company are getting in the way.

    Good overview without making it too complicated.
    Rosie Slosek recently posted..Am I a sole trader or a limited company?My Profile

    • Thanks Rosie!

      Agreed, it’s always worthwhile bringing in some impartial outside expertise. As I tried to outline in the piece, there’s no hard or fast rules as to what might be the right structure for you and your microbusiness. The limited company structure, whilst perhaps more tax-efficient, may not be right for everyone. The increased bureaucracy can certainly prove a drawback.
      Mark James recently posted..IR35 investigations may be on the upMy Profile

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