You have made up your mind. You’re stepping away from the relative comfort of employment and joining the increasing number of people who are now self-employed. You have probably decided on the area of architecture in which you will focus, even got a name, but what about how the business should be structured to help you achieve your goals? What should be considered when deciding whether to operate as a sole trader / partnership or having a limited liability vehicle?
Things to consider when incorporating your architecture firm
A summary of key points and considerations when deciding whether to incorporate your business are as follows:
| Sole trader/ Partnership | Limited Liability | |
|---|---|---|
| Liability | No separate legal entity, the sole trader is themselves the business. In the event of legal disputes, the sole trader will be sued personally, although insurance can help mitigate financial downsides. | Separate legal entity. You are a shareholder of the business and serve the company as a Director, with personal assets largely protected. Except for rare cases, the company will be sued in the event of legal disputes. Insurance can be taken by the company. |
| Taxation | No separate legal entity, the sole trader is themselves the business. In the event of legal disputes, the sole trader will be sued personally, although insurance can help mitigate financial downsides. | The company pays corporation tax on its taxable profits (currently 19%), with the net profit left in the company’s reserves. Tax efficient profit extraction is then a key consideration, often incorporating salary, dividends and pension contributions. For more on, profit extraction see here. |
| Commerciality | The business can be seen as less professional to clients, employees and other stakeholders such as banks and potential future acquirers. | Incorporation can convey enhanced professionalism to stakeholders, with debt often easier to obtain and potentially higher prices in the event of a future sale. |
| Exit | If a business (or the assets used by it) is sold, any gain is taxed personally under Capital Gains Tax (CGT) rules. A disposal of an interest in a business or disposal of business assets may qualify for CGT Entrepreneurs’ Relief. | If a business or its assets are sold, the company pays Corporation Tax on any profit made on disposal. The shareholders are then taxed on the distribution of the proceeds. It can be more efficient to sell shares in a company, rather than its trade and/or assets. Providing you own more than 5% of a trading company, a disposal with gains of up to £1 million may qualify for CGT Business Asset Disposal Relief (Entrepreneurs’ Relief). Company shares can also be gifted. |
The above points are just some of those which should be considered when deciding whether to incorporate an architectural business. A further option is that of a limited liability partnership (LLP), and a summary comparison between a limited company and an LLP can be found below.
There are many points to consider and the ideal structure for your business will depend on a number of different factors including whether R&D activity is performed, if the business has an international presence, remuneration planning and your strategy for succession.
Our architecture hub provides further insight into the various areas which are likely to impact an architectural business and for further information and an analysis of your or your business’s needs, please complete the contact form below:
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