All businesses are structured in a very specific way, varying between legal registrations to more informal structures. Finding the best one for you can help you succeed.
Company structures vary on many levels, from the level of tax paid to the administrative and legal requirements on directors. The structure you choose should depend on a number of issues including your industry, products and services, marketplace, number of company owners and target demographic. You may wish to seek advice from an accountant or solicitor before choosing a company structure; they can advise you on the most efficient structure for your business.
The easiest option in business is to function as a sole trader. There is limited administrative and legal work – only a self-assessment tax return in addition to accurate financial records. Unlike incorporated companies, you are fully responsible for business debts. This is a serious point; if you cause damage to third party property due to negligence and are sued the claim could very easily cause bankruptcy. In reality, this means your business is secured on your property as you may be required to sell this if you lose in court. Your options for financing are also limited to loans from banks and other business lenders.
Partnerships do not automatically refer to two people; they allow two or more people to set up a company together, with shared responsibility for liabilities and operational tasks as well as any profits generated. Partners have unlimited liabilities and could lose their home if company debts exceed their ability to repay. Partnerships are risky operations because of the trust required; you must have confidence in your partners as individuals and as business professionals. It is recommend to draw up a partnership agreement before the business starts to protect your investment. Statutory provisions provide some protection, although it is limited.
Limited liability companies
Limited liability companies are legal entities in their own right, allowing them to take legal action and own assets. Shareholders are not personally liable for company debts, which can be a significant advantage for homeowners. Other advantages include a more professional image and the option to pay profit via dividends and director salaries to maximise returns. The administrative burden is higher than with sole traders and partnerships; directors must submit annual accounts to Companies House. Please see our full guide to limited companies for more information.
Limited liability partnerships
Limited liability partnerships combine features of limited liability companies and partnerships; they are distinct legal identities with limited liability for partners and shareholders. They have more in-built flexibility than limited companies with more scope for informal decision-making. UK LLPs are tax transparent, which means that owners pay tax relative to income gained through the LLP rather than through corporation tax on profits. LLPs are commonly used by accountants and solicitors; the former because companies are not allowed to audit other companies and the latter because solicitors are not allowed to operate as companies. As relatively recent creations, some consider limited liability partnerships to be untested with the potential for issues to arise.