This blog post was originally published in 2018. Visit our guidance page for the latest information on this topic.
You’ve got a great business idea, you’ve done your market research, you have a business plan and cashflow forecast and you’re ready to start your new business. But, have you considered the business legal structure?
There are other business legal structures, including community interest companies and co-operatives, offshore companies and franchises. In this blog post, we’ll focus on the most commonly chosen routes.
Sole trader
A sole trader is considered to be ‘self-employed’. This means you must register with HM Revenue & Customs (HMRC) for self-assessment as soon as you start trading.
A sole trader is responsible for running their business and for meeting the legal requirements that come with it. As a sole trader, you can keep your profits after tax; however, you are also personally responsible for any debts of your business. A sole trader can employ staff.
If you’re a sole trader, you need to pay income tax and National Insurance subject to thresholds for profit generated.
You can submit your tax return online or through a paper application.
HMRC has short videos around different areas of tax, and there’s GOV.UK guidance on setting up as a sole trader.
Summary
Owner of the business, entitled to keep all profits but liable for all losses.
For:
- low cost, easy to set-up
- full control retained
Against:
- full liability for debt
Partnership
You and your partner(s) personally share responsibility for your business. Partners share the business profits, and each partner pays tax on their share.
A partner does not have to be an actual person. For example, a limited company counts as a ‘legal person’ and can also be a partner.
When you set up a business partnership you need to:
- choose a name
- choose a ‘nominated partner’
- register with HMRC
The ‘nominated partner’ is responsible for managing the partnership’s tax returns and record keeping.
A partnership agreement document outlines the liabilities, ownership, how profits of the business are split and what happens if one partner wants to leave. Each partner must register as self-employed and submit a separate tax return.
In a standard partnership all partners are fully responsible for all debts owed by the business.
Find out more about how to set up a business partnership.
Summary
Between two or more individuals who share management and profits.
For:
- a partnership is generally easier to form, manage and run
- more potential to raise finance
Against:
- full liability, affecting all partners
- partnership disagreements
Limited liability partnership (LLP)
In this legal structure, the number of partners is not limited, but at least 2 have to be ‘designated members’ responsible for filing annual accounts.
Just as with a limited company the LLP model protects its members’ assets, limiting their liability to however much they have invested in the business and any personal guarantees they may have given when raising loans.
As in an ordinary partnership, the members’ share of profit is taxed as income – each member must register with HMRC as self-employed. LLPs must also register at Companies House and there should be a members’ agreement stating what share of the profit each member should receive.
For more information on setting up and running an LLP, read the Companies House guidance.
Summary
Some or all partners have limited liabilities, and exhibits elements of partnerships and corporations.
For:
- flexibility: can be incorporated in members’ agreement
- advantages of limited company and partnership combined
Against:
- partners must disclose income
- LLP must start to trade within a year of registration – or be struck off
Incorporating a limited liability company (Ltd)
A private company is incorporated and limited by shares. This means that the company has shareholders and the liability of the shareholders to creditors of the company is limited to any money they originally invested. A shareholder's personal assets are protected in the event of company insolvency, but money invested in the company may be lost.
A company limited by guarantee must have at least one director and one guarantor. An individual may assume both positions, or there can be multiple directors and guarantors.
Company directors run the company on behalf of the shareholders. You can be both.
Limited companies must pay an application fee and be incorporated with Companies House. You can register online. You’ll need:
- the company’s name and registered address
- at least one director
- at least one shareholder
- details of the company’s shares
- rules about how the company is run - known as ‘articles of association’
Companies House has further guidance on incorporating a limited liability company.
Summary
Private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested.
For:
- less personal financial exposure
- limited liability protection
Against:
- involves set up costs
- annual accounts and financial reports must be placed in public domain
Further information
Contact the Business Support Helpline via the following channels:
- Telephone: 0800 998 1098
- enquiries@businesssupporthelpline.org
- Webchat
- YouTube
To keep in touch, sign up to email updates from this blog, or follow us on Twitter.
8 comments
Comment by Dr J.Knezevic posted on
This is very informative and clear.
Thank you.
Comment by Rasheed posted on
This is very informative and very precise.
Thanks.
Comment by C G Renner posted on
What about an unlimited company?
Comment by Jonathan Moyle posted on
With an unlimited company its shareholders (or members) have unlimited liability. This means that each member is jointly and severally liable for the debts of the company in the event of its winding-up. So if the company needs more money to settle its debts or liabilities on winding up, it can call on the shareholders to contribute whatever amount is necessary to make up any shortfall.
As always, we'd recommend you seek independent professional advice. You can contact the Business Support Helpline for further information.
Comment by Dave posted on
Where do I find the current provisions of limitation of liability for an LLP?
Comment by Jonathan Moyle posted on
Unlike companies, LLPs do not have to state or reveal their limited liability on any documents filed with Companies House.
Section 1 part 4 of the Limited Liability Partnership Act 2000 states that:
“The members of a limited liability partnership have such liability to contribute to its assets in the event of its being wound up as is provided for by virtue of this Act”.
In addition, LLPs have a partnership agreement. You’d normally expect this agreement to contain provisions around the members’ liabilities. These partnership agreements are not made public on the register.
Comment by Dave posted on
Thanks, Jonathan, but do you know where in the Act I find "such liability to contribute to its assets in the event of its being wound up as is provided for by virtue of this Act”?
Comment by Jonathan Moyle posted on
Hi Dave,
Section 1 (4) of the Limited Liability Partnership Act 2000.
http://www.legislation.gov.uk/ukpga/2000/12/section/1
Hope this helps.