What is the best legal structure for consulting business?

So you’re starting your own consulting business, but what’s the best legal structure to choose? There are regulations and financial responsibilities to consider, so keep reading this article to discover:

• What legal structures are available?
• The pros and cons of a limited company
• The pros and cons of a sole trader structure
• Managing your finances, whatever your structure

To take the first step to set up the business, you need to choose your structure. The two structures widely used in the UK are a sole trader proprietorship and a limited company structure.

Let’s look at what each entails.

A sole trader is a simple to manage structure, where you are the employee and owner of the company.

While you have complete control over the profits you make, you will be responsible for any debt you have. You and the company are treated as one in the eyes of the law, so any debt or financial liabilities will fall on your shoulders.

The setup for a sole trader is very simple, and there are fewer tax requirements. You’ll be responsible for managing your own tax, through submitting an annual self-assessment tax return on your profits, which details what you spent and what you made through the business.

As a professional consultant, you may be working for clients on a contractual basis. In this case, many professions require that contractors operate through a limited company.

A limited company takes a little more effort to set up. You’ll have to register with Companies House, as well as declaring yourself as an employee and employer — though this sounds confusing, it means that you will still be the owner and operator of the business but will register your company as an employer, and yourself as an employee, and your personal income tax is done through PAYE by the business. 

A lot of administrative work goes into running a limited company as there are different tax obligations you’ll need to manage, such as Corporation Tax and potentially VAT. You will still be required to do the business tax through an HMRC tax return, and you must submit annual accounts to Companies House. You are also required by law to have separate personal and business bank accounts as a limited liability company. 

A limited company can give off a more professional image and give you limited liability for any debt. In the eyes of the law, you and your business are separate entities, so if there was business debt your personal assets (such as your home or savings) would be protected. 

Before you decide what the best legal structure for your small consulting business is, let’s look at the positive and negative attributes you should consider before registering your employment status with HMRC.

• If your clientele only accepts contractors that operate through their own limited companies, then you’ll be ready to start gaining contracts.
• You can be IR35 compliant while working through your limited company structure.
• You may give off a more professional image
• You will not be personally responsible for any debt the business incurs while trading, if you are unable to make ends meet.
• You can bring in shareholders and other directors easily, to grow the business to a consulting firm.
• Corporation Tax is a smaller percentage of profit than you’d pay on Income Tax as a sole trader.

• The time required to manage the financial and tax responsibilities is significant. You may want to consider hiring a financial advisor or an accountant to support you with these administrative tasks, as they can be complex and time-consuming and you don’t want to get them wrong. However, this cost will factor into your expenditure, which means less profit.
• It costs more to run a limited company due to the incorporation fees, and the outside help you might require (such as an accountant).

• It’s cheap and straightforward to set up a sole trader business. You simply register with HMRC as self-employed, choose your name (which you don’t have to register with Companies House if you so choose), and you’re ready to go.
• All the profit you make is yours to keep, once you’ve met your tax requirements.
• You need to fill in an annual self-assessment for tax purposes, and that’s all, no other financial accounts or submissions are required (unless you’re making over £85,000 annually, then you will have to pay VAT).

• You may find it difficult to find consulting work for certain clientele, as they may have rules around hiring non limited company consultants.
• If you incur a lot of debt, say you have a company car or buy a business premises, then you will be responsible for paying that debt back if the company went under. This means that your personal savings or your home could be seized in order to pay any large business debts.

To make the right decision for you and your fledgling business, consider what kind of work you’ll be taking on, and if you require limited liability when it comes to your business debt. There are many factors to consider, so take your time to make the most informed choice — and know that you can change from sole trader to limited company or vice versa, later if you choose.

When running a business, it’s important to keep your personal and business finances separate from day one. If you do choose a limited company, it’s a legal requirement to have a separate account for your business funds, but we’d recommend a business current account even if you are a sole trader, to keep your accounting simple.

You need to have a clear picture of your business’ financial health, be able to track income and spending, and record expenses for tax returns, all of which are much more difficult if your personal expenses are mixed in. That’s why thousands of business owners use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here and start your three-month free trial today.