Starting a business is an exciting venture, but before you start trading, you need to determine the legal structure that suits your business goals and aspirations. Selecting the right business structure is crucial, as it affects everything from tax obligations to personal liability.
In this article, we'll explore the various types of company structures in the UK and provide guidance on choosing the best one for your small business.
How to set up a company
When it comes to setting up a company in the UK, there are a few key steps to follow:
- Define your business – clearly articulate your business idea, products or services, target market, and unique selling proposition. Conduct market research to validate your concept and assess whether it’s feasible.
- Choose a business structure – consider the different types of company structures available and weigh their pros and cons. This decision will impact your legal obligations, taxation, and personal liability.
- Register with Companies House – once you've decided on a business structure, you'll need to register your company with Companies House. This process involves providing key information about your company, such as its name, registered address and details of company directors and the company secretary.
- Fulfil legal requirements – ensure you comply with all legal requirements, such as filing annual accounts, submitting a confirmation statement and paying taxes. Get to know the obligations associated with your chosen business structure.
Types of company structures
There are four primary types of business structures in the UK: sole trader, partnership, limited liability partnership and limited company. Let's explore each one in more detail:
A sole trader is the simplest form of business structure, suitable for individuals who want to start a business on their own. As a sole trader, you have complete control over your business, keep all the profits and make all the decisions.
It’s important to note that as a sole trader, you personally bear responsibility for any debts and liabilities your business incurs. Remember that this includes all personal assets, particularly those jointly owned with another person.
Sole traders must operate within the framework of the Income Tax Act and register with HM Revenue and Customs (HMRC) for self-assessment tax returns. There’s no maximum amount you can earn as a sole trader, but the more you earn potentially the less tax efficient it can be, so keep an eye on it and seek advice.
Two or more individuals come together to form partnerships when they decide to start a business. Partnerships encompass two primary types: general partnerships and limited partnerships. In a general partnership, all partners actively share equal responsibility and liability for the business's debts and obligations. Conversely, a limited partnership comprises general partners with personal liability and limited partners with restricted liability.
The Partnership Act 1890 governs partnerships and outlines the rights and obligations of partners. Although having a Partnership Agreement isn’t legally required, it’s highly recommended to establish one. Such an agreement serves to clarify the roles, responsibilities, profit-sharing and decision-making processes within the partnership.
Limited liability partnership
This is similar to a partnership, but the partner’s liability is limited to the amount of money invested in the business. You must register your LLP with Companies House and with HMRC. Annual accounts also have to be prepared and filed.
An LLP can be incorporated with two or more members, and a member can be an individual or a company. Members' responsibilities and share of the profits are set out in an LLP Agreement, and all members must submit a personal Self Assessment Tax Return every year, pay income tax on their share of the partnership’s profits and pay National Insurance to HMRC.
A limited company is a separate legal entity from its owners (shareholders). It provides limited liability protection, meaning the shareholders' personal assets are generally safeguarded in the event of business debts or liabilities. Limited companies can be further classified into two types: companies limited by shares and companies limited by guarantee.
Companies limited by shares are the most common type of limited company. They are governed by the Companies Act 2006 and are required to register with Companies House. You will need to provide a Memorandum of Association and Articles of Association. Shareholders' liability is limited to the value of the shares they hold and profits can be distributed as dividends.
Companies limited by guarantee are commonly used by non-profit organisations. They have members rather than shareholders and are subject to similar legal requirements.
What company type is best for me?
Determining the best business structure depends on several factors, including your long-term goals, financial aspirations and risk appetite. Consider the following points when making your decision:
- Liability – if you're concerned about personal liability and want to protect your personal assets, forming a limited company is often the most suitable choice. This way, your liability is limited to the amount you invest in the business. Limited companies are subject to the laws and regulations outlined in the Companies Act 2006, which governs their operations and provides guidelines on matters such as corporate governance, financial reporting and shareholder rights.
- Tax efficiency – limited companies enjoy certain tax advantages, such as the ability to claim a wider range of business expenses and potentially pay a lower tax rate on profits. However, the tax implications of each structure can vary, so it's crucial to seek professional advice. Limited companies must comply with the tax laws set out by HMRC, including filing annual corporation tax returns and submitting financial statements.
- Growth and investment – if you plan to raise capital or attract investors in the future, a limited company structure is generally more appealing to potential investors. It offers clear ownership through shares and allows for easier transfer of ownership. Investors are familiar with the legal framework surrounding limited companies, and the Companies Act provides mechanisms for issuing shares, raising capital, and conducting shareholder meetings.
Administrative requirements – consider the administrative responsibilities associated with each business structure:
- Sole traders have minimal administrative burdens, as they’re not required to file annual accounts or adhere to complex reporting obligations.
- Partnerships, on the other hand, require the preparation of a Partnership Agreement outlining the rights and responsibilities of each partner.
- Limited companies have more stringent administrative requirements. They must file annual accounts with Companies House, submit a confirmation statement to update company information and comply with various statutory obligations. Additionally, limited companies need to appoint at least one director and may benefit from having a company secretary to ensure compliance with legal and regulatory requirements.
Get legal assistance from LawBite
Choosing the right business structure is a key step when starting a business in the UK. By understanding the types of company structures available and considering factors such as liability, tax efficiency, growth potential and administrative requirements, business owners can make an informed decision that aligns with goals and protects the company's interests.
At LawBite, we believe in doing law differently. Our mission is to provide practical and tailored legal solutions to entrepreneurs, startups and small businesses.
Remember, selecting the best legal structure for your business is an important decision that can impact your financial and legal obligations. Take the time to research, seek professional advice and ensure you fully understand the implications of each structure before making your choice. With the right structure in place, you'll be well-positioned for success as you embark on your venture.
Trust LawBite as your partner in navigating the legal landscape and safeguarding your business for long-term success. To explore how we can support you with the company formation process and provide guidance as you scale, book a free 15 minute consultation or call us on 020 3808 8314.