Choosing a structure for your business
There are a number of different ways in which a business can be set up. There are no strict rules as to which type of business structure should be chosen for a particular trade or sized business, but it is important to understand how each legal structure of a business works, to assist you in deciding on how to run your business.
The following business structures are most commonly used in the UK:
In running a business as a sole trader, you will be self-employed and work for yourself. You will run the business alone, be responsible for making all decisions affecting your business, and you will own all the business assets personally.
There are minimal formalities and low administration costs involved in setting up and running a business as a sole trader. The simplicity of the business structure makes it a particularly attractive choice for smaller businesses.
However, you should be aware that as a sole trader, you yourself will be personally responsible for any debts and liabilities that the business incurs. This means that creditors could try to recover the business debts from you personally and your own assets, such as your home, could be at risk.
In setting up your business as a sole trader, you should decide on a trading name. You can trade under your own name, or you can choose another name for your business. There is no need to register your business name, though you should include the chosen business name on all official paperwork, such as business letters and invoices.
For additional protection in stopping other businesses from using your name and logo, you can create and register a trademark. You will also need to register with HMRC in order to pay income tax and National Insurance.
One of the key features of a private limited company (by shares) is that it has a ‘separate legal personality’ from the company’s owners. This means that the company itself can own assets, enter contracts with third parties, and, crucially, be responsible for its own debts. Operating your business under a limited company would therefore offer you great protection personally, as your personal assets would not be at risk if the company got into debt.
In a limited company, there is a separation of management and ownership. The owners of a company are called its shareholders and the managers of the business are called the directors. A company can have one shareholder or multiple shareholders, and the same also applies to directors. If you wish to have an active role in running your business then you can be both a shareholder and director. Otherwise, you can appoint someone else as director, to run the company for you.
Whilst the above features often sound appealing to potential business owners, there are more onerous formation requirements involved in setting up a limited company. A company needs to be registered with the government agency ‘Companies House’. Certain information such as the company’s registered office address and the names of its shareholders and directors will be made publicly available.
A company is also required to have ‘Articles of Association’, which is essentially the company’s rule book which governs how it operates. There is, however, a standard set of Articles named ‘Model Articles’ that a company can adopt rather than creating its own.
Once the company is set up, the company will also have some ongoing obligations to file accounts and other documents with Companies House.
You will need to choose a name for your company, which must end with ‘limited’ or abbreviated ‘ltd’, and the name cannot be an already existing company name. You can use the company name availability checker on the government website to check that your chosen name is not already in use.
To register your company with Companies House, an application can be made on paper or electronically via the government’s website. The application is relatively straightforward and will ask you for details such as the company name, the intended shareholders and directors, the type of business that will be run, and a copy of its Articles. There is also a small fee involved with making the application.
In a partnership, the business is run between two or more people (its ‘partners’). The partners will share responsibility for running the business and will share its profits. A business partnership does not have a separate legal personality from the partners. Instead, the partners themselves are jointly responsible for the debts and obligations of the business.
There are minimal formation requirements involved with setting up a business partnership, and there is no need to register a partnership with Companies House or file any accounts with them. A partnership may therefore be a suitable option for you if you wish to run your business jointly with another person, and you wish to keep your administration and formation obligations minimal.
When setting up a partnership business, you and your partners should choose a business name and register with HMRC for tax purposes. Though not a strict requirement, it is desirable for the partners to enter into a written partnership agreement, which will govern the relationship between the partners.
A limited liability partnership, (also known as an LLP), is owned and run by its ‘members’, of which there must be at least two.
An LLP is very similar to a limited company in a number of aspects. An LLP has ‘separate legal personality’, and therefore its members benefit from limited liability for the business’s debts. An LLP must be registered with Companies House, it has ongoing obligations to file accounts and other documents with Companies House, and certain information including the LLP’s registered office address and the names of its members will be publicly available.
The main difference between an LLP and a limited company is that an LLP has the organisational flexibility of a partnership and is also taxed as a partnership. LLPs tend to be a popular choice for professional businesses, such as law firms and accountants.
Similarly to setting up a limited company, you must choose a name ending in LLP that is not already in use. An application must be made to Companies House, either on paper or electronically via the government’s website, again accompanied by a small fee.
It is also desirable for the LLP to have its own LLP agreement which governs how the LLP is run. This, however, is not a strict necessity and a number of default rules would apply by law to an LLP without an agreement.
If you need help choosing a structure for your business, get in touch with our corporate and commercial team for expert advice and guidance.
Contact Holly to discuss this further.
