How to choose a business structure

Liability, tax, administration and credibility. The right answer depends on which of those matters most to you now.

Names differ by country but the underlying choice is broadly consistent: trade as yourself, or trade through a separate legal entity.

Step-by-step

1. Enter your expected profit.
2. Enter what you need to draw.
3. Compare the structures on tax, administration and liability.

Liability is the important one

Trading as an individual means your personal assets are exposed to business debts and claims. A limited company is a separate legal person, and in principle the exposure stops at what you put in.

Two caveats. Lenders routinely require personal guarantees from directors of small companies, which reinstates the exposure for that debt. And limited liability does not protect against your own negligence or wrongdoing.

Tax is rarely the deciding factor early

At modest profits the difference is usually small and can favour either structure depending on the country and how you draw money. At higher profits a company frequently becomes more efficient, because you control the timing and form of what you take out.

Choosing a structure purely on a tax comparison at low profit is optimising the smallest variable.

Administration is a real cost

A company means annual accounts, filings, a separate bank account, and usually an accountant. That is money and time every year, whether or not the business does well.

Credibility

Some customers, particularly larger organisations, prefer or require dealing with a company. In some sectors it matters a great deal and in others not at all.

Frequently asked questions

Does a limited company protect my personal assets?

In principle yes, but lenders often require personal guarantees from directors, and limited liability does not cover your own negligence.

Is a company more tax-efficient?

Often at higher profits, because you control how and when money is taken out. At modest profits the difference is usually small and can go either way.

Can I change structure later?

Generally yes, though it involves cost and administration. It is easier to start simple and incorporate later than to unwind a company you did not need.