Small business structures

4 Choosing a business structure

Figure 4  Choosing a structure to match the size

Having explored the types of business structures that exist we will now look at how to decide on the correct business structure. We will look at the key questions to ask and use two of the case studies to demonstrate how the choice is made.

The key questions are:

  1. How big is the business likely to be?
  2. Who are the clients?
  3. How many people will be involved in the business and will there be employees?
  4. Are there specific rules for the type of business, for example waste disposal of food hygiene?
  5. How will the business be financed?
  6. What is the turnover for the business likely to be?
  7. Is the business likely to be sold in the future?
  8. What are the potential consequences if the business fail?

We will start by taking the example of one of our mini case studies, Mucky Pets. (To open the case study in a new tab on a PC, hold down the Ctrl key when clicking.)

Key question Answers Implications
How big is the business likely to be? Small part time business Generating supporting income
Who are the clients? Private individuals with pets, repeat customers Local word of mouth, build up client list to service on a regular basis. Customers not likely to recover VAT on purchases so no benefit from VAT registration
How many people will be involved in the business and will there be employees? Single person Only the owner is involved so a sole trader arrangement would suit.
How will the business be financed? Using owners own money and a small bank loan Uses owner’s money, would suit simple tax return and self-employment arrangement
What is the turnover for the business likely to be? £8000 per year Well below the limit for compulsory VAT registration
Is the business likely to be sold in the future? No Trade is likely to be based on the competence of the owner. The equipment could be sold but it is unlikely to be sold as an ongoing concern
What are the potential consequences if the business fail? Claim for damage to pets, no large debt issues. Public liability insurance required. Little chance of significant legal claim against the business.

Recommended business structure and justification:

Based on these points, Mucky Pets should set up as a simple ‘sole trader’. There are fewer responsibilities and the owner effectively uses their own money to run the business and takes any surplus as their own. The key responsibility is the submitting of an annual tax return and registering as self-employed. The loan for the equipment is seen as a personal loan and secured against the owner’s personal assets.

An accountant could be retained but for simple tax returns this is not essential.

The owner should get specific advice and take out insurance suitable for the industry to insure against claims from pet owners.

Now it is time for you to try this activity. This time consider JJ Components. (To open the case study in a new tab on a PC, hold down the Ctrl key when clicking.) Here is the table for you to complete.

Activity 6

Allow about 15 minutes

Complete this table for JJ Components, once completed click ‘Save and reveal comment’ for our views:

Key question Answers Implications
How big is the business likely to be?
Who are the clients?
How many people will be involved in the business and will there be employees?
How will the business be financed?
What is the turnover for the business likely to be?
Is the business likely to be sold in the future?
What are the potential consequences if the business fail?

Recommended business structure and justification: