Types of business
There are a variety of options that you can choose when deciding the legal structure of your business.
How you set up your business depends on what services you offer. It can also affect the way you pay tax, funding options and your personal liability.
In business terms 'personal liability' is when an individual may become personally liable to pay business debts or make payments to third parties.
The most commonly used structures in an equestrian setting are:
Community Interest Company
If you’re a sole trader you run your own business as an individual and are self-employed.
As a sole trader, you can keep your profits after tax; however you are also personally responsible for any debts of your business.
You need to set up as a sole trader if any of the following apply:
- You earn more than a certain amount from self-employment in a tax year.
- You need to prove you’re self-employed (for example to claim Tax-Free Childcare).
- You want to make voluntary Class 2 National Insurance payments to help you qualify for benefits.
As a sole trader you have absolute control over your business and get to keep the profits after tax.
This business model offers comparative simplicity, versatility and:
- Is easy to set up with low start-up costs.
- Allows for simplified accounting.
- Gives a tax allowance on business assets.
Registering as a sole-trader costs nothing . Accounting costs and tax liabilities are likely to be cheaper than if you started a limited company.
Sole traders can still employ people, but you must collect income tax and National Insurance contributions (NICs) from them and pay these to HMRC. You'll need to operate a PAYE (Pay As You Earn) payroll scheme for this purpose.
Being a sole trader involves some personal financial risk.
As a sole trader, you are the business. It's not a separate legal entity, as it would be if you formed a limited company. Therefore you're liable for your business's debts.
If you're starting a business that won't build up big debts becoming a sole trader isn't too risky. If you are likely to build up significant debts, setting up a limited company would possibly be a better option.
As a sole trader, you are unlikely to be able to access any charitable funding or grants from sporting bodies, for example Sport England.
Set up steps
1. Naming your business
You can trade under your own name, or you can choose another name for your business. You do not need to register your name.
2. Register for Self-Assessment
You need to tell HMRC that you will pay tax through Self-Assessment by registering online.
The latest you can register with HMRC is by 5 October after the end of the tax year during which you became self-employed. The tax year runs from 6 April one year to 5 April the next.
After registering, HMRC will send you a letter with your 10-digit Unique Taxpayer Reference (UTR).
You’ll need to:
- Keep records of your business’s sales and expenses.
- Send a Self Assessment tax return every year.
- Pay Income Tax on your profits and Class 2 and Class 4 National Insurance - use HMRC’s calculator to help you budget for this.
3. Paying tax
Sole traders pay tax before the 31 January following the end of their tax year.
Crucially, HMRC will request payments on account for the following year's estimated tax - on 31 January and 31 July each year.
If you put money into a sole trader tax fund bank account every month when it comes time to pay HMRC you'll be glad you put a few pounds away each month.
4. Paying VAT
If your turnover is over a certain amount (£85,000 in year ending April 2021) you must register for VAT.
When you're VAT registered, you charge your customers VAT on VAT-able sales and pay it to HMRC. In turn, you can reclaim the VAT you pay on goods and services you buy.
Advice and further information can be found on Gov.uk
Eleanor wanted to start offering training and clinics for clients in order to bring in some money to help support her own horses.
She wanted flexibility to coach when it suited her so that she could continue to compete and wanted her business to be her name so that it became familiar to prospective clients.
Registering as a sole trader is the best business option for her.
The business partnership model enables you to go into business with someone else without the formality of a limited company.
Each partner is self-employed and takes a share in the responsibility of the business.
Partners share the business’s profits, and each partner pays tax on their share and is responsible for any losses the business makes.
- A partnership is a relatively simple and flexible way for two or more people to own and run a business together.
- It is less formal with fewer legal obligations such as there is no need to complete a Corporation Tax Return.
- Partnership businesses can easily be dissolved at any time: this gives each partner the freedom to choose to leave if they wish to.
- Whereas a limited company needs to submit their accounts to the public record, the affairs of a partnership business can be kept confidential.
- You are able to share the profits with your business partner(s).
- The business has no independent legal status and unless a partnership agreement with alternative provisions is put in place, it will be dissolved upon the resignation or death of one of the partners.
- Unlimited personal liability. The partners are personally liable for debts and losses incurred, so if the business runs into trouble your personal assets may be at risk of being seized by creditors, even if you only own a portion of the company.
- Potential for differences and conflict with your business partner.
- All the profits must be shared.
- You are unlikely to be able to access any funding or grants from sporting bodies, for example Sport Scotland.
Michael and Alex decided to form a partnership for their producing young horses business.
They had a solicitor draw up an agreement that outlines each of their roles and responsibilities to the business partnership and what would happen if a disagreement was to take place.
This became helpful when Alex decided to leave, and allowed the partnership to be dissolved amicably.
Set up steps
When you set up a business partnership you need to:
1. Name your partnership
You can trade under your own names, or you can choose another name for your business. You do not need to register your name.
2. Choose a 'nominated partner'
The ‘nominated partner’ is responsible for managing the partnership’s tax returns and keeping business records.
3. Register the partnership
You must register your partnership for Self-Assessment with HM Revenue and Customs (HMRC)
All partners also need to send their own tax returns as individuals.
You must register by 5 October in your business’s second tax year, or you could be charged a penalty.
E.g. If you started a partnership or became a partner during the 2020 to 2021 tax year, you must register before 5 October 2021.
4. Registering for VAT
You must also register for VAT if your VAT taxable turnover is more than the current threshold.
You can choose to register if it’s below this, for example to reclaim VAT on business supplies.
Gov.uk have a guide on how to set up a partnership business.
Kate and Jane decided to set up a livery yard in Warwickshire at a rented premises with great facilities.
A solicitor drew up an agreement to ensure that it was completely clear what each of their business responsibilities were on a day to day basis, but also in the event of one of the partners deciding to leave.
They initially wanted to call their business Rolex Equestrian Services, but they couldn’t use the name Rolex as it is already trademarked. They settled on Pinfold Equestrian as this was the name of the farm and it was not associated with any other company or registered name.
Jane became the 'nominated partner' and took responsibility in registering the business and managing the tax requirement.
They registered themselves for VAT because although they didn’t anticipate being over the VAT threshold themselves, it meant that they could reclaim VAT from some of their suppliers who did charge it (feed merchant and farrier).
Registering as a partnership is the best business option for them.
A limited company has a legal identity separate to that of its directors and shareholders, unlike a sole trader.
A limited company is a company ‘limited by shares’ or ‘limited by guarantee’.
Limited by shares (CLS) companies are usually businesses that make a profit. This means the company:
- Is legally separate from the people who run it.
- Has separate finances from your personal ones.
- Has shares and shareholders.
- Can keep any profits it makes after paying tax.
Limited by guarantee (CLG) companies are usually not-for-profit. This means the company:
- Is legally separate from the people who run it.
- Has separate finances from your personal ones.
- Has guarantors and a ‘guaranteed amount’ (usually £1).
- Invests profits it makes back into the company.
This structure is useful for businesses taking on a considerable amount of risk because:
- It is a separate legal entity and so there is limited liability. In case the company goes into financial difficulty, the assets and personal finances of shareholders are protected beyond the value of their shareholding. This means that if a company is unable to pay debts, the shareholder will only have to contribute according to the nominal value of their shareholding. It can be as small as £1.00.
- It can allow for more tax efficiency. This can be complex, but simply there is more opportunity and great flexibility are offered by limited companies in the case of taxation on profits and on personal income. The directors can keep their income level below the higher bands by taking remuneration in a combination of dividends and salary. This results in more money being available for reinvestment or distribution among the shareholders and directors. Sole traders don’t have any such strategy to save tax.
- If you are a not-for-profit Company Limited by Guarantee (CLG) you can apply for grants from awarding bodies eg. Sport England.
- Limited companies are more complex to form and to manage.
- Generally, there are more costs to setting up a limited company.
- There are certain restrictions with regard to the company name.
- The information relating to the owner of the company and the company are displayed on the public record.
- The accountancy costs are more expensive and a professional accountant might be required.
Set up steps
1. Selecting your directors
Every limited company must have at least one director (someone responsible for running the company), but they can have more. In fact, there’s no limit on the number of directors a company can appoint.
||You can also appoint a company secretary, but you don't have to do so. A company secretary is responsible for ensuring the smooth administration of the company. They usually assume responsibility for the following important areas: compliance with corporate governance and other financial and legal regulations.
Learn more about directors responsibilities here
2. Selecting who the shareholders or guarantors are
A limited company needs at least one shareholder. Shareholders can also be directors.
A CLG does not have shareholders, instead it has guarantors (members of the company).
Learn more about shareholders and guarantors here.
3. Identifying people with significant control (PSC) over your company
A person with significant control (PSC) is someone who owns or controls your company. They’re sometimes called ‘beneficial owners’.
You must identify your PSC and tell Companies House who they are. This might be you, or someone associated with your company. A company can have one or more PSCs.
You must record their details on your company’s PSC register, and you’ll need to include this information when you set up (incorporate) your company.
Learn more about PSC here.
4. Naming your business
As no two limited companies are allowed to share the same name, you’ll have to come up with an original name for your business.
Your name must usually end in either ‘Limited’ or ‘Ltd’. Check the Companies House register to see if your name is available.
5. Preparing the documents that agree how to run your company
This can be a timely task and one for which you possibly need to invest in support from a solicitor.
For a limited company you will need to prepare a 'memorandum of association' and 'articles of association'.
Learn more about the memorandum and articles of association here.
6. Registering the company
You must register your limited company with Companies House - you can either do this yourself or through a third party provider who can be found through a simple search on google: 'form a company'.
As a limited company you need to register for Corporation Tax online when you start doing business.
Corporation Tax is paid on trading profits, investments and by selling assets for more than they cost. It can be complex and it is advisable to engage an accountant to calculate and deliver your Annual Tax Return.
You don’t get a bill for Corporation Tax. You’ll need to file a Company Tax Return by your deadline (HMRC will let you know when this is) even if you make a loss or have no Corporation Tax to pay.
Discover more about registering for Corporation Tax here.
Lean more about all of the types of taxes here.
Ashley and Jay have decided to set up buy a property with stables and grazing to set up a livery yard.
Before they start trading, they need to invest in the facility by renovating the stables and arena as they haven’t been used in a while.
Because of the high initial outlay they have decided to incorporate as a limited company, to avoid taking any personal business liability.
Ashley, Jay and both of their fathers all became directors and equal share holders of the company.
Registering as a Limited Company is the best business option for them.
Community Interest Company (CIC)
A Community Interest Company (CIC) is a limited company created for community benefit - usually a social enterprise.
A CIC is not dependent on donations and fundraising, as it will have a mix of income including contracts, trading income (lessons, livery) and grants.
It is a not-for-profit company structure, this means that it does not operate for private profit. Any profit generated is used to grow and develop the business which is benefiting an identified community/group.
- A CIC is is quick, easy and inexpensive to set up and specifically designed for the social enterprise. It is far more simple to set up compared to a charity.
- As it is a not-for-profit, you can apply for grants from awarding bodies eg. Sport England.
- It is a separate legal entity and so there is limited liability. In case the company goes into financial difficulty, the assets and personal finances of shareholders are protected beyond the value of their shareholding. This means that if the CIC is unable to pay its debts, the shareholders will only have to contribute according to the nominal value of their shareholding. It can be as small as £1.00.
- As compared to other charitable company, Community Interest Company has greater flexibility in terms of activities, no trustees and no trustee control, fewer reporting and administration requirements.
- If a CIC is dissolved, its assets remain locked for use for a social/charitable purpose.
- CIC’s require a lot of compliance such as the formalities of incorporation, filing accounts, and maintaining the company register, along with reporting to the CIC regulator.
- Donors may be more comfortable donating to charities as they are better known.
- CICs pay corporation tax like a regular company.
Set up steps
To set up a CIC, you’ll need:
- A ‘community interest statement’, explaining what your business plans to do.
- An ‘asset lock’- a legal promise stating that the company’s assets will only be used for its social objectives, and setting limits to the money it can pay to shareholders.
- A constitution - you can use the CIC regulator’s model constitutions.
- To get your company approved by the community interest company regulator - your application will automatically be sent to them.
- To register your CIC online with Companies House. You’ll need to create a Government Gateway user ID and password for your company. You cannot use your personal Government Gateway ID.
1. Naming your business
The same rules apply to naming your CIC as any other business, although you must add the following to the end of the name:
Public Companies “community interest public limited company” or “community interest plc”
Other companies “community interest company” or “CIC”.
2. Paying tax
A CIC is liable to Corporation tax as a company. This applies to all it’s trading profits, investment income and any gains. It’s an asset locked body that must ensure any profits/assets are used for the benefit of the community.
Unlike a charity, a CIC is not entitled to any specific corporation tax exemption.
3. Paying VAT
CIC status does not automatically equal VAT Exemption.
You might still achieve VAT exemption, but this is subject to satisfying specific set of rules. When the CIC reaches the VAT threshold you need to make an application to get the VAT exemption.
Jarvis is setting up Giddy Up CIC as a social enterprise to provide young adults with learning disabilities the chance to work with horses.
Giddy Up CIC aims to generate at least 50 per cent of its income from providing a retirement livery service. The remaining income will be generated through grants and from social services for providing the social enterprise activities.
The CIC model was straight forward to set up and ensured that Jarvis had no personal business liability.
Because Jarvis will not have focus on fundraising it would be incorrect for him to register as a charity; albeit if he wished to change this in the future, starting as a CIC will give him the correct foundations to move the business to a charitable status.
Jarvis can pay himself as a wage, but any profits will be reinvested into Giddy Up CIC.
Registering as a CIC is the best business option for him.
A charity is set up as a limited by guarantee (a company) and then as a charity with the Charity Commission.
The objects and purpose of every charity must be 'charitable' as defined by law, and furthermore, they must also fulfil the 'public benefit test' as set out in the Charities Act. The company's articles of association should reflect this.
There are four main types of charity structures:
- Charitable Incorporated Organisation (CIO).
- Charitable Company Limited by Guarantee where there are no shareholders only members who control the company and there is no share capital. Those who run the company (members) are protected from personal liability if the company was ever to go into debt. These are also non-profit, meaning they cannot give their members the profits, but must use them within the company.
- Unincorporated Association.
- Tax exemptions: Charities are generally exempt from income/corporation tax, capital gains tax, or stamp duty, and gifts to charities are usually free of inheritance tax.
- Rates relief: A charity pays 20% of normal business rates on the buildings which they use and occupy.
- Fundraising: Charities are often able to raise funds from the public, grant making trusts and local government and the public more easily than non-charitable bodies. Charities can reclaim gift aid on donations from private individuals.
- A charity can be timely and complex to set up.
- A charity must have exclusively charitable purposes.
- Trustee Remuneration: Trustees are not allowed to receive financial benefits. They are however entitled to be reimbursed for their reasonable out-of-pocket expenses.
- Reporting requirements: Charity law imposes certain financial reporting obligations; these vary with the size of the charity.
- Conflict of interest: Trustees need to avoid any situation where charitable and personal interests conflict.
Set up a charity
1. The first steps
Find trustees for your charity - you usually need at least three.
Make sure the charity has ‘charitable purposes for the public benefit’. This may include health, animal welfare, education, amateur sport, community development etc.
Create a ‘governing document’. The objects and purpose of every charity must be 'charitable' as defined by law, and furthermore, they must also fulfil the 'public benefit test' as set out in the Charities Act. The company's articles of association should reflect this.
2. Naming your business
Your charity name must not:
- be similar to the name of an existing charity (unless you can prove you need to use it).
- use words you don’t have permission to use, for example a trade mark.
- use offensive words or acronyms.
- be misleading, for example suggest your charity does something it doesn’t.
You can use:
- abbreviations, for example Riding for Disabled is known as RDA.
- alternative names, for example Comic Relief is a working name for Charity Projects.
You must apply to register your charity if:
- its income is above the minimum threshold per year or it’s a charitable incorporated organisation (CIO) it’s based in England or Wales (the rules are different in Scotland and Northern Ireland).
4. Paying tax
As a charity you don’t pay tax on most of your income and gains if you use it for charitable purposes - this is known as ‘charitable expenditure’.
This includes tax:
- on donations
- on profits from trading
- on rental or investment income, eg. bank interest
- on profits when you sell or ‘dispose of’ an asset, like property or shares
- when you buy property
Charities pay tax on:
You must pay tax on any money you don’t use for charitable purposes. This is known as ‘non-charitable expenditure’.
A charity is not exempt from paying VAT when trading but it is eligible for some VAT reliefs.
Liz has some fields on her farm and would like to provide rescue ponies and horse sanctuary.
Whilst she is happy to not receive any income for the land, she would like to cover the ongoing costs to provide the care the horses require.
She has a number of fundraising events planned and is asking people to donate to cover these costs.
Liz has four volunteers who share her passion and they have agreed together to develop the vision.
Registering as a Charity is the best business option for her.