Which Company Type Should You Choose?

Starting a business is a series of difficult decisions. And when it comes to which type of company we ought to choose, few of us are experts. However, the type of company you choose may shape your business for years to come, so it's best to be as informed as possible.

Different business types are appropriate for different types of businesses. So choose the type of company that is most appropriate for you.

Private Limited Company

One of the advantages of a private limited company for sole traders is the fact that it affords them limited liability. This means that if your business fails, your personal income, which is considered to be separate, is protected.

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Those who set up a limited company may also find themselves benefiting from a lower tax rate. Income tax in the UK is set to 40 percent for those earning £32,000 to £150,000. That means that if you're a sole trader and you earn £60,000, you'll pay a 40 percent tax on everything you earn above £32,000.

However, if you are a limited liability company, you'll pay the corporation tax rate of 20 percent on any income you earn. This is higher than the tax you'd pay on the personal allowance. It's the same as the basic rate of income tax. But it's much lower if your earnings are greater than £32,000. So if you expect that your company will earn more than, say, £40,000 a year, then it will be more tax efficient to trade as a limited liability company.

Limited liability companies also have benefits over and above that which you'd get as a sole trader. Not only are your assets not on the line if your business fails, you'll also appear more credible. People generally perceive limited companies in a better light than they do sole traders and partnerships. And if your company is limited, customers are more likely to trust you.

In a way, a limited company is rather like getting free marketing. You automatically build a degree of trust.

What's more, you can find company formation resources readily online. It's usually a simple process, involving a single transaction with the Formations Company. And it usually costs a little over £100 to set up, which isn't a great deal when you consider all of the benefits.

Limited Liability Partnership

Sometimes, however, you may opt to form a limited liability partnership. Partnerships tend to be quite a flexible, but you'll often have to work a little harder to build a good reputation. At the outset of the limited liability partnership, you'll have to draw up a contract between yourself and the other partners.

Because people in partnerships are often close friends or relatives they think that they don't have to draw up a contract. This is a bad idea. A contract is needed to clearly define each person's role. It also needs to function as a legal document so that disputes can be resolved. Too often partnerships break down because of disagreements or arguments between the initial partners.