Will Cookson, partner at Harbour Key, explains why the structure of your business has a significant effect on its performance...
That ‘suit’ your business wears, the one you pulled off the peg in those exciting start-up days, may be looking a bit threadbare now. Your partner is probably telling you it is time to admit that you need the next size up, or perhaps something smarter and more in keeping with your success.
What your business wears has a significant effect on how well it can perform and adapt.
Not only could you have outgrown it, you may have even chosen the wrong one in the first place. Your business structure affects how much tax you pay (and when it is payable), can reduce your ability to attract, retain and motivate key staff and, ultimately, could affect your exit strategy.
Is it time to change your business structure?
The common trading ‘outfits’ you can wear are: a company, a partnership, a limited liability partnership (LLP), a sole trader, or a combination of these.
The ‘suit’ you choose must meet the commercial needs of both the business and the business owners. For example, insurance brokers like the title ‘partner’ as it adds serious cachet, so you might want to have key people in a partnership (or LLP).
However, if a company works better for other aspects of your business you may need a company/partnership hybrid. Ultimately, if it is not set up to meet all your commercial goals, it will not work.
You want the best of the best and that may mean giving away part of your business to entice the best candidates to join you. If you are a young business that can be risky based upon a CV and a few interviews.
To summarise, these are some of the pros/cons of different ‘suits’ in terms of employment:
• Partnerships (including LLPs) mean you are self-employed, so there are no employment rights, which can be attractive for some organisations. Partnership structures can also reduce the amount of national insurance your business pays.
• Companies have the benefit of employment contracts, so may give you more control over employees who might otherwise walk away with your ideas or clients. Shareholder directors of limited companies can also split their income between remuneration and dividends.
• A sole trader keeps things simple for an individual but you may need to change this to accommodate growth.
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