Debbie Austin FCCA on the different operating structures for when you start-up your new business.
Beginning the journey with your new start-up brings much excitement and plenty of challenges. There will be many questions and things you need to find the answer for, one of which will likely include, what are the different types of business structures?
The structure you choose will have significant implications on the amount of tax you pay, the degree of your personal liability (should the business fail), the amount of administrative work involved and even your ability to raise finance.
Starting out with the wrong set up can result in a lot of complications later on and may require extensive advice to sort it out. That will come at a significant cost should you need to move to an alternative structure.
What are the different types of UK business structures?
There are 4 main types of business structures in the UK and each has various tax and liability implications for owners and shareholders:
This is the simplest and easiest form of business to register. You are a self-employed sole trader if you start working for yourself and you must register this business with HMRC. As a Sole Trader, the business is run by you.
You are therefore entitled to keep all of the profits as income but will be liable to pay tax and national insurance by filling out a Self Assessment Tax Return. There is no maximum amount you can earn, but it can become less tax efficient in the higher tax brackets.
You will be responsible for all liabilities and this includes all personal assets as well as those jointly-owned with another person.
A Partnership involves two or more individuals that agree to share in the profits or losses of the business. They share the risks, costs, benefits and responsibilities of running an organisation. Partnerships are referred to as unincorporated entities in that the partners are self employed. They are personally responsible for the losses or debts that the business undertakes.
Each partner is also responsible or liable for other partner’s negligence or misconduct. The profits or losses from a partnership will be shared between the partners. This will be in the agreed profit sharing ratio and each partner pays tax on their share of the profits.
Limited Liability Partnership (LLP)
An LLP is similar to a partnership except that the partner’s liability is limited to the amount of money they invest in the business. The LLP must be registered at Companies House and with HMRC. Annual accounts also have to be prepared and filed.
An LLP can be incorporated with 2 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 privately managed business, owned by its shareholders and run by its directors. The company is a separate legal entity with its own legal rights and obligations. This means the company is responsible for everything it does and its finances are separate to the personal affairs of its owner(s).
Any profits generated are retained by the company, after it pays Corporation Tax. Only then can the profits be distributed to shareholders in the form of dividends. Limited companies can be limited either by shares or by guarantee which is explained below, plus they have annual reporting and filing requirements with both Companies House and HMRC.
The benefits of this are:
You can decide on remuneration packages at your discretion (if you are the controlling shareholder)
The business can retain profits
You can protect your brand
You can claim back expenses on the business
1. Limited by shares
Most limited companies are limited by shares which means the shareholders responsibilities for the company’s financial liabilities are limited to the amount that the shareholder has agreed to pay for the shares.
2. Private company limited by guarantee
A company limited by guarantee does not usually have share capital or shareholders, but instead has members who act as guarantors.
For both the sole trader and the partnership you don’t need to go through any formal processes to set the business up. Both of these don't require the formation of a separate entity. However, you will need to register with HMRC and comply with the associated rules.
The formation of a separate entity required for a Limited Liability Partnership and a Limited Company is a more complex process. You will firstly need to register the company at Companies House and draft the company’s Memorandum and Articles of Association.
Why you should use an accountant to incorporate
Whilst it’s possible to incorporate a company for a small fee without professional help, someone without an in depth knowledge of financial/business matters may have problems completing the forms and documents accurately.
Financial advice before starting up can provide invaluable insight as to which of the different business structures might best suit your ambitions and personal financial requirements. If you incorporate without making use of this knowledge then you could find yourself running into all sorts of issues further down the line.
The content of this post was created on 03/05/2016 and updated on 21/02/2022.
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