An area that leaves many Network Marketers stumped is which trading style or business structure they should go for when setting up their business. When we talk about trading styles, we mean the legal structure of an organisation. There are 4 main types in the UK, and we look at their key features and who they are most suitable for in this blog.
It is important to note that which trading style you go for will have implications on the amount of tax you pay, the level of personal liability and the amount of administrative work. It’s worth noting that trading styles can change over time as and when the business grows – so you could start out as a sole trader and after a few years of growth you could choose to change to a limited company.
Sole Trader
Key features
This is the most common trading style for Network Marketers. It’s easy to get registered with HMRC and as a self-employed sole trader you keep all profits as income. You do have to pay tax and National Insurance contributions and will be required to complete a self-assessment tax return. A benefit of being a sole trader is the flexibility of what do with losses.
Who is it suitable for?
New business owners
Partnership
Key features
A partnership is similar to the sole trader option in the sense that partners are self-employed. In a partnership setup, two or more people share the responsibilities, risks and costs associated with the business. Profit and losses are shared on a pre-agreed basis, and each partner is responsible for paying tax on their profit share.
Who is it suitable for?
New business owners who choose to work with a business partner
Limited Company
Key features
As a privately managed business, a limited company is owned by its shareholders, and each shareholder’s liability is limited by their initial investment. Their personal assets are protected should the company become insolvent assuming that they haven’t given any personal guarantees. Limited companies are run by Directors.
Any profits are retained by the company which – after paying Corporation Tax – can be shared amongst the shareholders via dividends. Limited companies also need to file annual reports with Companies House and HMRC.
Who is it suitable for?
More established and profitable businesses where the owners can choose to build up the cash reserves of the company and defer the payment of personal tax by paying dividends out of the company in the future.
Limited Liability Partnership
Key features
In a Limited Liability Partnership (LLP) each partner has limited liability based on the amount of money they invest in the business. An LLP needs to be registered with Companies House and HMRC, and annual accounts need to be submitted. Individuals and companies can be members of an LLP.
Profit shares and members’ responsibilities are outlined in a partnership agreement, and each member must submit a Self-Assessment Tax Return, pay Income Tax on their profit share and pay National Insurance contributions.
An LLP does not have share capital so it makes the transfer of ownership to new members more straightforward than a limited company.
Who is it suitable for?
Business owners who want the protection of Limited Liability status but also want the ownership flexibility offered by LLPs.
If you have any questions regarding trading styles or business structures for your Network Marketing business, please call our team on 01444 458252 or email us at info@prbmp.com.