Whatever kind of pub you wish to run, you will need to decide on its legal structure.
Otherwise known as the business structure, it affects the way you account for the money that goes into and out of your business, as well as the amount of tax you pay.
There are four options to choose from:
- Sole Trader
- ‘Ordinary’ Partnership
- Limited Liability
- Limited Liability Partnership
You need to carefully consider these options. A variety of factors should inform your decision, such as: the amount of money you can wield, your projected profit and the availability of – and the desire to have – suitable business partners.
This article simply aims to give anyone who wants to run a pub an overview of the pros and cons of each legal structure.
Before making any decision, it’s best to seek professional advice from an accountant.
The term ‘Sole trader’ simply means you are responsible for the business. It doesn’t mean you can’t employ anyone!
Accounting and tax for sole traders: In a sole trader arrangement profits are taxed as income. Meanwhile you must pay fixed-rate Class 2 National Insurance contributions and Class 4 contributions will be payable on your profits.
An annual self-assessment must be sent to HMRC. Thankfully, the HMRC’s online filing system makes the process relatively simple.
- The set up process is quick and simple.
- The profits go straight to you and not to a separate business entity.
- There are no registration fees.
- You make all the decisions about your business.
- You only need to produce simple, unaudited accounts.
- You are personally responsible for any debts. That means your house, your car, everything you own is fair game in the recovery of debt.
- You have less social security benefits than if you were employed.
- You must raise any money for the business yourself.
In a partnership two or more people will share the decision-making responsibilities, business risks and costs. Each of you is regarded as self-employed. It’s a particularly popular way for couples to go about running a pub.
It’s essential that a written agreement is drawn up which details how the partnership will work.
This should include:
– The amount of money to be invested by each partner.
– How profits will be shared.
– How much time each partner will contribute.
– What the spending limits are.
– A breakdown of what happens in the event of a partner wanting to reduce their involvement – what is the process they must go through? What does it mean for existing partners?
Accounting and tax for ‘ordinary’ partnerships: Similar to the sole trader arrangement, each partner will be taxed on their share of the profits.
Fixed rate Class 2 National Insurance will be payable and so will Class 4 contributions – the latter is dependent on each individual’s share of the profits and will be calculated from the details of your annual self-assessment.
Note: partnerships in Scotland are known as firms and they have a ‘personality’ which is distinct from the individual partners.
- Like a sole tradership, setting up a partnership is quick and painless.
- Partners share all the profits.
- Sharing decisions can lighten the burden of responsibility.
- The financial risk is spread between the different partners.
- By introducing new partners, more finance can be raised. Your pub could even have sleeping partners who contribute money but have little to do with the running of the business.
- Each partner has equal personal liability for the business debts even if incurred by another partner.
- Differences of opinion between partners needs to be skillfully managed.
- Partnerships can be dissolved through disputes or the resignation, death or bankruptcy of a partner.
Limited Liability Company
You are no longer the company. This means that your liability is restricted to the money you’ve committed to investing in the company. Your personal possessions are not at risk.
A limited company requires one or more shareholders. You as the publican may be the sole shareholder of the company. Or you may have other investors on board who stand to earn a slice of the pub’s profits (through dividend payments).
You can pay yourself a salary, and if applicable, top up your pay with dividends. (A professional accountant can advise you on this.)
There must also be at least one director and a company secretary. The standard practice is for the licensee to appoint themselves as the company director.
Accountancy and tax: Companies pay corporation tax on the level of profit they earn. The company also has to pay Class 1 National Insurance contributions for all its employees.
Directors will be taxed on their salaries and pay Class 1 National Insurance (PAYE).
- Your liability is limited. That means your personal belongings are not on the line.
- Owning a limited company lends greater credibility to a business.
- It’s potentially a more tax efficient way of running a pub.
- The formation process is more complicated.
- Setting up costs are greater.
- An increased need for professional accountancy advice – and that will come at a price.
- National Insurance payments may be higher.
- There are additional rules and regulations you must follow.
- You must register the business with Companies House.
- Your financial information is publicly available.
Limited Liability Partnerships
Accountancy and tax: Each partner of the company will be taxed on their share of the profits. As in a partnership arrangement, the partners will have to pay fixed rate Class 2 National Insurance while Class 4 contributions will need to be paid on their share of the profits.
An annual partnership self-assessment must be made by each partner.
- A partners liability for debts is limited. Your house and car is not on the line!
- Partners can share the burden of financing the company.
- Two minds (or more) can be better than one for the decision-making process.
- More complicated formation process – and more expensive to boot.
- Your financial information is available to the public.
- You must register with Companies House.
- Accounts must be filed with Companies House.
- There are additional rules and regulations to follow compared with an ‘ordinary’ partnership.
If you’re running a pub for a pub company or brewery firm, you will receive guidance on the issues explored in this article. Freeholders will need to seek out independent advice from a chartered accountant experienced in the pub trade.
For more info on what’s involved in running a pub, you might be interested in our special resource ‘How to run a pub: the definitive guide.’