What company structure is best for an aesthetic business?

What company structure is best for an aesthetic business?
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    If you are looking to launch your own aesthetic business, there is a key thing to consider before you jump in – which business structure is best?

    As a new aesthetic business owner, you can launch as a sole trader, limited liability partnership or private limited company. The right decision largely depends on your goals, financial position and projected profits. An accountant can provide a valuable sounding board as you weigh up the pros and cons.

    This blog will take you through the basic advantages and disadvantages of the different business structures to help guide you in launching your new venture.

    For personalised advice on company registration and small business accounting, please contact AudTax. We are specialists in accounting for aestheticians and can provide valuable insight on how to manage your finances and achieve greater tax efficiency.

    What choice of business structures do aesthetic businesses have?

    As with any small to medium-sized business, there are three options when it comes to establishing a new aesthetics business venture: sole trader, partnership agreement and limited company.

    In our experience of working with aestheticians, very few choose the partnership route, so we will concentrate on the other two for the purpose of this blog.

    What’s the difference between a sole trader and a limited company business?

    Before we dive into the advantages and disadvantages, let’s establish a fundamental difference between these two business structures.

    As a sole trader, there is no legal distinction between you and your business – you are your business. That means you have sole responsibility for your business’s debts and legal position. Should you run into financial trouble, your personal assets, i.e. your car, home and possessions, could be at risk.

    In a limited company, the business has its own legal identity and is considered a separate entity from you, the director. Therefore, you have limited liability, i.e. if your company has financial difficulties, then you are not liable for the debt, and your personal assets are secure.

    There are many other differences, but now you have a basic understanding of what each structure means, let’s weigh up the pros and cons.

    Sole trader aesthetic business

    When you start a new business, you are eager to get going and bursting with ideas! That’s why many aesthetic business owners start off as sole traders, as it is the simplest way to get a new venture off of the ground.

    There’s no need to register the company with Companies House; it’s simply a case of registering for self-assessment with HMRC once your profits exceed £1,000.

    You will then be required to submit a self-assessment tax return to HMRC on an annual basis, declaring your total taxable income, from which you can deduct certain business expenses.

    Once your profits reach the personal tax-free allowance (currently £12,570), you then start paying income tax at a rate commensurate with your gross income.

    Pros of running an aesthetics business as a sole trader

    Quick – once you have premises from which to trade, a business name and the equipment you need, you can begin trading right away.

    Simple – there is no paperwork, just a quick online registration process with HMRC.

    Easier accounting – managing your accounts as a sole trader is far easier than for a limited company, as there are fewer legal requirements, which means less paperwork.

    No profit sharing – as a sole trader, you may have sole responsibility, but you also have sole access to your profits!

    Cons of running an aesthetics business as a sole trader

    Personal financial risk – you are solely liable for your business debts and any legal action that it may face. You may lose personal assets if your business runs up debts.

    Lack of credibility – you might lack the gravitas of a limited company in the eyes of suppliers, business partners and customers, meaning you could miss out on lucrative opportunities.

    Tax limitations – as a sole trader, there’s only one way to pay the tax you owe, i.e. income tax. As your profits grow, your income tax bill may become very large, and it may not be the most tax-efficient way to run the business.

    Financial management – there’s no need to have a separate business bank account as a sole trader, but that means you have to be very careful about how you manage your personal and business transactions, which can get tricky.

    Limited company aesthetics business

    As an ambitious aesthetic practitioner, you can choose to launch as a limited company from the start, which is a route many aesthetic business owners take. Alternatively, you can make the switch from sole trader to limited company once your business is up and running.

    To do so, you must register your company with Companies House, the UK’s official registrar for companies. You can choose to do this by yourself, but the help of an accountant can save you valuable time. If you are a mobile aesthetic practitioner, then an accountant can also supply you with a registered business address.

    As a limited company owner, you will have many new legal responsibilities, and the company will pay Corporation Tax (and VAT if applicable). Depending on how you remunerate yourself, you may also have to complete a personal income tax return.

    Learn about VAT on aesthetics in our blog here.

    Pros of registering as a limited company for aesthetic practitioners

    Legal and financial security – as a company director, you are a separate legal entity to your business, so there is less of a financial risk to you personally.

    Tax advantages – limited companies can be more tax efficient, as there are several ways that the company directors can be paid. e.g. salary, dividends, or a combination of the two. You can weigh up the most tax-efficient option for you and your company.

    A professional image – limited companies can appear more professional than sole traders, opening up new doors of opportunity.

    Cons of registering a limited company as an aesthetics business owner

    Less financial freedom – as a sole trader, you have full access to your profits, but taking money from a limited company must be done in line with UK law.

    More bureaucracy – registering a company is much more complicated and time-consuming than setting up as a sole trader, with lots of additional paperwork.

    More legal responsibility – while directors enjoy limited liability, the company has a lot of legal responsibilities to Companies House, such as filing annual accounts.

    More complicated accounting – it’s wise to have professional accounting advice for a limited company, as record-keeping requirements are more stringent when Corporation Tax is involved.

    How do you determine what business structure will work best for your business?

    Which business structure you choose largely depends on:

    Your personal and business objectives: do you intend to work full-time or part-time? Are you planning on opening an aesthetic clinic or being a mobile practitioner? Do you have ambitions for business growth and taking on employees?

    Cost: Limited companies require more initial investment but may offer better tax benefits in the long run.

    Appetite for risk: as a sole trader, you have less financial security than as a company director. What is the financial risk to you in setting up your business, and what can you afford to lose? What would happen if something out of your control, such as a pandemic, forced you to stop trading?

    Potential earnings: What is your projected profit in the first year? Depending on your level of gross income, would it make sense to register as a limited company for tax efficiency?

    If you are unsure about your position, it is very wise to talk to a professional accountant like AudTax. Our highly experienced team has an in-depth knowledge of UK tax law and can help you to understand which legal structure is right for your business. Once you are up and running, we can support you with tax planning on a regular basis.

    Can you switch from one business structure to another?

    Many aesthetics business owners make the switch from sole trader to a limited company as their business grows and becomes more profitable.

    If you wish to go back to sole proprietorship after running a limited company, then you must formally dissolve the company and complete all necessary paperwork with Companies House.

    Get expert business advisory with AudTax

    When it comes to deciding on the most beneficial business structure, a professional accountant is best placed to offer advice. At AudTax, we are not only accountants but experienced businesspeople. We can help you see the bigger picture and explore the immediate and future benefits of each option.

    If you decide to register as a limited company, we can liaise with Companies House and HMRC on your behalf and take on the administration so that you can get on with the much more exciting task of launching your aesthetic business.

    If you go down the sole trader route, then we can provide valuable support in the form of bookkeeping and assistance with your self-assessment tax returns.

    We work with many people in aesthetics and have a good working knowledge of your industry. That means we know your challenges and opportunities, the importance of maintaining a good cash flow – and exactly where to find valuable tax savings.

    Contact AudTax today for a free consultation.

    Conclusion

    When opening a new aesthetic practice, you first have to decide on your business’s legal structure. Most people choose to launch as sole traders or limited companies. Both come with pros and cons, and which one is right for you depends on your goals and financial situation. It is wise to consult an accountant to decide which route is the most beneficial to you now and in the future.

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    Picture of Shahood Ahmed BSc, FMAAT, AFA MIPA

    Shahood Ahmed BSc, FMAAT, AFA MIPA

    Shahood is a fully qualified accountant, and holds UK memberships in numerous accounting bodies. Having worked in many accounting roles, he decided to set up his own practice to provide clients with the best accounting services, offering sound business advice.

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