One of the most important decisions you can make when you’re starting your small business is deciding what legal structure it will take. The structure you choose has an important effect on the way your business works.
If you’re a little lost on what structure might be best for your business, we hope this guide will help.
What are the options?
There are a number of different options available, including:
- Sole trader
- Limited partnership
- Limited company (Ltd.)
- Limited liability partnership (LLP)
Each one works in a different way, and each one comes with pros and cons.
What is a sole trader?
If you plan on setting up a one-man band, becoming a sole trader is the simplest way of starting your business. As a sole trader, you will be responsible for the day-to-day running of the business. You won’t need to incorporate or register your business with Companies House. You’ll also be subject to minimal regulation.
Some of the main disadvantages include the fact that your business won’t have a separate legal entity from yourself. You’ll be personally liable for your company’s debts and contractual obligations.
It can also be much hard to get business financing when you’re set up as a sole trader.
Pros and cons of being a sole trader
What is a partnership?
A partnership is also a relatively simple way of starting a business, and it’s perfect if you’ll be going into business with one or more other people. You don’t have to have any kind of formal agreement, but it’s a good idea to draw up a partnership agreement. This will set out the share of profits and capital contributions. As a partnership, you also won’t need to register with Companies House.
As with being set up as a sole trader, the individuals in a partnership will be personally liable for the company’s debts and activities, and the business won’t have a separate legal personality. Each partner will need to be registered with HMRC as self-employed.
Pros and cons of forming a partnership
What is a limited partnership?
A limited partnership is not the same thing as a limited liability partnership (LLP), which we’ll talk about later on. Limited partnerships consist of two types of partner – general partners and limited partners. The main difference from a standard partnership is that the limited partners cannot be involved in the business’s management and their liability is limited to the amount they’ve invested.
If you choose to form a limited partnership, you’ll need to register with Companies House. Changes to the limited partnership will also need to be registered.
What is a limited company?
This is the most common type of company. The most important difference between a limited company and a sole trader or partnership is that the company has a separate legal personality from its members. This means that the owners and directors of the business are not personally liable for the company’s debts and responsibilities.
However, limited companies are more tightly regulated. A limited company must be registered with Companies House and must submit annual accounts and returns about the company. These then become public records and can be viewed by anyone.
There are two main types of limited company when it comes to ownership:
- Company limited by shares – This is the most common type. Each member of the business owns one or more shares, becoming shareholders. Each share usually comes with voting rights, meaning the owner of the share is eligible to vote on important company decisions. Shareholders can own more than one share, and this usually has an impact on the number of votes they have (one share one vote). In a company limited by shares, each member has limited liability, and only stands to lose what they’ve invested. A company limited by shares can raise capital by selling shares, giving the new shareholder a stake in the company.
- Company limited by guarantee – In this type of company, members make a guarantee to pay a certain amount if the company goes into liquidation. There are no shareholders, and each member has an equal vote (one member one vote).
Companies limited by shares can be either private or public:
- Private limited company (Ltd) – A private limited company is the most common form. Each private limited company must have at least one member.
- Public limited company (Plc) – A public limited company differs from a private limited company in that the shares can be sold to the public. Public limited companies are open to greater scrutiny and regulation. They must have at least two directors along with a qualified company secretary. A public limited company can become a listed company, by “floating” their shares on a stock exchange. This allows them to sell their shares more widely.
Pros and cons of forming a limited company
What is a limited liability partnership?
Limited liability partnerships are like a hybrid of normal partnerships and limited companies. As the name suggests, the partners in an LLP enjoy limited liability, meaning they’re not personally liable for the company’s debts. The company also has a separate legal personality, meaning the company can enter into contracts as itself.
Non-corporate members of a limited liability partnership must register as self-employed with HMRC and pay income tax and NI contributions on their profits. The LLP must be registered with Companies House and must submit annual accounts and returns. An LLP must have at least two “designated members”, who hold additional responsibilities such as signing-off accounts for Companies House.
Pros and cons of forming a limited liability partnership
For more advice on setting up your business, make sure you check the GOV.UK website. You should also consider seeking professional advice from a solicitor or accountant.