Choosing the right Structure for your Student Business
Now that you have read through our top tips for starting a business from university, and have begun to consider your business plan and what that will consist of, it is time for you to decide how your business will be structured. The structure of your student business can play a big part in how your business can grow and making the right decision now can truly set you up for success.
As a new student business starting out, the four most common business structures are sole trader, partnership, limited company, and limited liability partnership. Whilst there are other structures that may suit your business further down the line, it is always advised to employ a simple structure for a new business, and then alter the structure when necessary.
Sole Trader
A sole trader structure is a very popular way of starting a business, particularly for students starting a business alongside their studies that might not have a big pot of money to plough into the business. You have sole ownership of the business as a sole trader and make all of the decisions, meaning that you will enjoy any and all of the profits that your business makes, whilst also covering any losses too.
Advantages of a Sole Trader Business Structure
Make your own decisions — As you are your own boss, you have complete control over how your business is run, and the decisions that need to be made. You can ensure that your business operates in the way that you believe is best, and you do not have anybody else to answer to.
Your business remains private — Sole traders do not have to register their business with Companies House, meaning that your business does not have to submit details on directors or any other business-related details, preserving your privacy.
Inexpensive way to start your business — It is free to start as a sole trader, as all you have to do is notify HMRC of your new business, whilst other business structures require you to pay to set the company up.
Easy to adapt the structure of your business — If your business reaches a point where it needs to expand to move onto the next level, a sole trader structure allows you to adapt the structure of your business very easily.
All profits are yours to keep — One of the biggest advantages of a sole trader structure is that you get to keep all of the profits that your business makes (after tax), and do not have to share them with anybody else. This means that you can make the decision to put all profits back into the business to try to expand, or keep them for yourself, without anybody else having an opinion.
Disadvantages of a Sole Trader Business Structure
Funding the business — As you are the sole owner of the business, finding funds for the business to use for operations and growth can often be difficult, potentially limiting the success that your business can achieve.
Full liability — A sole trader is not recognised as a separate legal entity, and so the liabilities and debts of the business will fall on you as an individual if anything goes wrong. This can have an impact on you and your possessions and could potentially harm your studies too.
Less credibility — Sole traders have less credibility in the market, and some customers will choose not to deal with sole traders at all. If this is the case, this means that your business will be losing business simply because of its structure. Being a sole trader may limit your options, and so it is important to consider whether this is likely to have an impact on your business and its future success.
Pay more tax — All of the profits that you make as a sole trader are subject to income tax, which means that you cannot be sure how much tax you will pay. If your business is more successful and generates more profit, you will pay more tax than a less successful year of trading. You will also pay more tax this way than a business that has the same success and profit levels with a different business structure, so you must consider all aspects of the different structures.
Partnership
A partnership as a business structure involves 2 or more people that run a business together as co-owners. All partners of the co-ownership work together acting on behalf of each other and, much in the same way as a sole trader, all individuals within the partnership are not separate legal entities. The individuals within the partnership share management of the business, make decisions by working together and share the profits that the business generates.
Advantages of a Partnership
Easy to start your business — Your partnership can be formed on a verbal or written agreement, it is very easy to register with HMRC for tax purposes, and again you are not required to register your company with Companies House. All partners, however, will have to register themselves online for self-assessment. It is also wise to produce a partnership agreement, which clearly outlines how the partnership will operate and how certain situations will be resolved.
Not as many legal obligations as other structures — When compared to a limited company, a partnership is much less formal and brings fewer legal obligations. You must always keep track of your incomings and outgoings, however you do not need to complete a Corporation Tax Return with this business structure, instead you will submit a Partnership Tax Return to HMRC. A partnership can come to an end at any point, however if you have a partnership agreement, this may make things more difficult.
Work alongside partners — In a partnership, you can come to better decisions through thorough decision-making processes. With more than one person trying to find solutions to situations or making decisions on how something should be handled, it is likely you will reach the best decision. As well as this, simply having somebody to bounce ideas off and to share the burden can allow you to enjoy starting a business much more than when doing it alone.
Broader skillset and more experience — With more than one person playing their part in running the company, your business will benefit from a broader skillset, more experience, greater knowledge, and a bigger list of contacts. This can only be good news for the prospect of achieving success, as everyone can do what they do best!
Access to more finances — Whilst you will have more skills and experience to count on, more partners means more access to finances too. Everyone can bring their own finances to the table, which can be used for operations and to grow the business.
Easy to receive profits — Profits made from a business partnership are shared between the partners, without firstly being held within the partnership, like is the case with a limited company. This means that you have easier access to your profits, benefiting from the success of your business sooner!
Disadvantages of a Partnership
Higher personal taxation — Perhaps the biggest disadvantage of a partnership is the way in which partners pay their tax. Partners must pay tax by submitting a self-assessment, in the same way that a sole trader does, whilst also being required to register as self-employed with HMRC. Paying tax in this way means that if the business is more successful and profits are higher than expected, each partner will therefore pay more in tax.
Disagreements between partners — As is the case whenever more than one person is involved in decision-making processes, there is likely to be at least some disagreements between partners. Some people will have different opinions to others, and so there are always going to be different thoughts on how things should be done. Hint — this is where a partnership agreement is very useful!
Personal liability for each partner — This type of business structure leaves partners at risk if the business faces financial difficulty, as partners share the liability, which could impact your personal life. This could be managed by being a limited liability partnership, which use the partnership structure, just with limited liability.
Unfair profit sharing — As profits are shared equally between partners, it can sometimes be the case that some partners benefit from the same amount of profit, without having put as much time and effort into the company.
Limited Company
A limited company is a company privately owned, with the owners being legally responsible for any debts up to the amount of capital that they invested. A private limited company is typically owned by shareholders, and are limited by shares, which is why they are only financially responsible to the value of their share. In this structure, the company directors are indeed considered to be separate legal entities to the limited company.
Advantages of a Limited Company
Protected by limited liability — If your business is a limited company, you have much more protection for if things go wrong, in comparison to a sole trader structure. As previously mentioned, you will only be liable for debts up to the amount that you invested into the company, whereas a sole trader is liable for the whole amount. The company is also considered to be a separate legal entity, and so any contracts with suppliers or clients are made with the company, rather than you as an individual.
Tax-efficient business structure — With a limited company comes increased tax and national insurance efficiency. In comparison to a sole trader, who will see all of their income be subject to a national insurance contribution, a director of a limited company can take a large majority of their income as a dividend and pay less tax and insurance than they would on a larger salary.
Greater credibility in the market — A limited company offers you the credibility and trustworthiness that every highly successful business requires, providing confidence to both your customers and suppliers. In certain industries it is vital that you are a limited company, as many people and businesses will simply refuse to work with anybody that isn’t a limited company, having a significant impact on the success that you can achieve. A limited company breaks down those barriers, giving you and your business many more opportunities.
Easier to sell or transfer ownership of the business — Should there ever be a situation where you wish to sell your stake in the business, or it must be transferred to somebody else for any reason, it is much easier to do so with a limited company structure. Everything owned by the company is simply transferred over during the process, whereas as a sole trader, it is likely that you personally own much of what is used for business operations, making it a much more complex situation.
Legally protected trading name — There can only be one registered company in the UK with any given name, and so the name that you choose when setting up your business is legally protected. The same protection is not given to sole traders, however, and somebody else could create a business with the same name and there would be nothing that they could do about it. Therefore, a limited company is not only protected against another company using their name, they can also be sure that public perception of their brand cannot be tarnished by other businesses.
Disadvantages of a Limited Company
Complex admin and accounts responsibilities — The first disadvantage that you would have to deal with is the fact that a limited company has a more complex setup process. This is because you must register with Companies House and pay a fee to set the business up. On top of this, as a limited company you will be required to keep all finances and accounts up to date monthly, and these accounts can be very complex. If you make any mistakes or do not keep the correct records, you could be in trouble with HMRC, often leading to fines.
Higher expenses — As a student, it is highly unlikely that you will have any knowledge or experience of maintaining the accounts for a limited company, so it is essential that you pay an accountant that does. Accountants can be very expensive as they complete several essential tasks for your business, but this cost truly is unavoidable to prevent any fines.
Less privacy — As you must register a UK limited company with Companies House, you will have much less privacy in comparison to a sole trader. Information such as company directors, shareholders and accounts must be provided by you, which can then be viewed by anybody once published by Companies House.
Multiple decision makers — A key difference between a limited company and a sole trader is that with a limited company, there is often multiple shareholders that all contribute to the decision-making processes of the business. A sole trader can make their own decisions as it is solely down to them, however a limited company must consider all opinions and thoughts of shareholders before any final decisions are made.
Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is a business structure employed by businesses of all sizes, combining aspects of both a partnership and a limited company. An LLP must be created as a business looking to generate profit; however, it does not have to pay corporation tax as each partner is classed as self-employed and therefore must complete their own tax return annually.
Partnerships and LLP’s are structured in the same way, whilst profits and tax liability are also the same. However, in comparison to a traditional partnership where partners are personally financially responsible, an LLP agreement will see partners have much less financial responsibility if anything goes wrong.
Much like a limited company, an LLP must register with Companies House when the business is set up, meaning that they too must keep a strict record of everything related to the business. Whilst an LLP means members have limited liability, there must be at least two partners that hold additional legal responsibilities.
BusinessTeacher.org provide academic support to business students, with a fantastic range of free business resources and learning tools. Our business case studies, business lectures, and business study guides are perfect for helping any student develop their business knowledge and gain a better understanding of how to structure their student business.
With resources based on businesses of all sizes and from a range of industries, you are sure to find our resources helpful for choosing the right structure for your student business.
