There are several factors that could determine your choice of business structure. These include the complexity of setting up and the amount of paperwork involved, the taxes that need to be paid, personal responsibilities or liability if the business fails or makes a loss and how to get a profit out of the business.
Determining your choice of business structure
What are the main options?
The four most common ways to set up in business are:
- as a sole trader
- in partnership with others
- as a private limited company
- as a limited liability partnership (LLP)
A sole trader operates a business as an individual. If you decide to set up as a sole trader you will be personally liable for paying the bills and responsible if the business makes a loss. You’ll need to keep records of your business and make sure you declare the right tax to HMRC.
For more information, read Operate as a sole trader.
If you decide to set up a partnership, you and your partners will be responsible for running the business. You will share the profits and losses between yourselves.
All the partners are personally responsible for paying the bills and dealing with any business losses.
For more information about partnerships, read Running a business partnership.
Private limited company
In private limited companies, the company’s finances are separated from your personal finances and the company is a legal entity in its own right.
This means that the company's owners' (typically called shareholders or members) liability is limited to the amount which they have invested, plus any unpaid for shares. Generally speaking, this means that if you are the sole shareholder in a company and you have bought 20,000 shares in the company at a value of £1, if the business fails and becomes insolvent your own personal assets (eg your house) would not be required to be sold off to pay the debts of the company.
The company must pay corporation tax out of any profits and can then distribute the remaining profits among shareholders. It’s run by the directors who owe legal duties to the company and its shareholders.
This is one of the most popular business structures in the UK and is a good choice for those who wish to limit their personal liability.
For more information about limited companies, read Run a private limited company.
Limited liability partnership (LLP)
As with a company, an LLP is a separate legal structure. Instead of shareholders and directors, it has 'members' who both own and manage the LLP. The minimum number of members is two and they share profits between themselves. For more information about LLPs, read Types of partnership.
Generally, partners are only personally responsible for the debts and losses of the partnership to the amount of their initial investment.
LLPs are most suitable for professional services firms, like accountants, solicitors and chartered surveyors.
How do I decide which structure to use?
Ultimately this is an exercise of weighing up the pros and cons. Questions you should ask yourself include:
- Do I want my finances to be separate from the business?
- Am I willing to devote time to setting up a company or LLP and dealing with the extra administration involved in running it?
- Am I comfortable with financial information about my business becoming public (ie filed at Companies House) if I go down the company or LLP route?
- Will my business be seen as more professional or established if it is a company or LLP which is registered and regulated by Companies House?
- How complex will it be to run my business? This is a key consideration, read Running your business to help you make this decision.
However, we would typically advise small businesses owners to set themselves up as a private limited company as we generally consider limited liability status more than outweighs the increased administrative burden of running a limited company.
If you are still undecided about which structure to use or need more help, remember that you can always Ask a lawyer.
And finally…tax matters
Importantly, when selecting the best route you should also consider which will be most efficient or advantageous from a tax perspective.
The route you take will affect the amount of tax you and/or your business will pay and determine whether you are eligible for certain tax reliefs and grants.
An accountant or tax advisor can make valuable recommendations based on your (and your business partners’) circumstances and objectives.
The cost of obtaining advice to help you pick the right route at the outset could prove very worthwhile in the long term.