Carl Reader, director of d&t Chartered Accountants and Strategic Advisors, explains how to select the business structure that suits you best
It is an exciting time. You have committed to investing in starting your own business. One of the things to consider is how to structure your new business for maximum benefit to you, the owner. While some franchisors may define how their new franchisees should structure their businesses, others give flexibility.
If you have the option to choose the legal structure for your new business, choose wisely as each format has different taxation rules and personal liability implications. You need to opt for the structure that provides you with the highest benefit. Detailed below are the options available to new franchisees:
This is where you trade on your own account - you are the business. You will need to keep records and prepare annual accounts to be included on your personal tax return that is submitted to HM Revenue & Customs each year. You do not have to create formal accounts to submit to anyone else, unlike limited liability companies and partnerships. This has the added benefit of typically lower accountancy fees.
You will need to pay tax in January and July each year, based on the profit generated. Commercially, you are regarded as the business - so any business debts are in your name, not in a separate legal entity.
As the name suggests, this is where you are in business with another person. Similar to a sole trader structure, you will need to keep records so you can prepare accounts each year for your partnership tax return, which will then flow through to your personal tax return. Tax is payable each January and July, based on the profits you receive. Partners in a partnership have joint and several liability for any business debt.
Limited liability partnership
The tax treatment is the same as for a partnership, but there is also limited liability protection, which means your personal assets are protected from business liabilities. There are advantages for separating your business from your personal assets. The annual accounts also need to be filed with Companies House and typically the accounting costs will be higher than that of a partnership.
This is a tax efficient way to structure your business if profits are over £25,000, as all income is taxed at 20 per cent. Money is then extracted by way of a small salary and dividends. As well as the corporation tax implications, this structure ensures your business and personal affairs are kept separate.
You will need to ensure there are no reasons prohibiting one specific business structure. For example, there are various VAT exemptions that require a business to be structured either as a sole trader or partnership, which would then mean a limited company or LLP would not be advantageous to you.
You also need to consider if the business is set to make a loss in the first year. If this is likely and you have been employed previously, setting up as a sole trader or partnership will allow you to carry back losses. This should result in you receiving a tax rebate, which will no doubt assist with your cash flow at the crucial early stages of business development.
When looking at the different options that are available, it is advisable to discuss which would be most advantageous to you with a firm of specialist franchise network accountants. Franchise accountants understand the structure and relationships between franchisee and franchisor, saving you time and often resulting in better advice.
When choosing a franchise accountant, make sure they are chartered and have British Franchise Association affiliate status. To ensure you get the best advice, it is also worth asking them how many active franchisee clients they have across which sectors.
The implications of getting the structure right or wrong could be thousands of pounds, even for relatively small businesses.