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.
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.
Owner of the business, entitled to keep all profits but liable for all losses.
- low cost, easy to set-up
- full control retained
- full liability for debt
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 HM Revenue and Customs (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.
Between two or more individuals who share management and profits.
- a partnership is generally easier to form, manage and run
- more potential to raise finance
- 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.
Some or all partners have limited liabilities, and exhibits elements of partnerships and corporations.
- flexibility: can be incorporated in members’ agreement
- advantages of limited company and partnership combined
- 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.
Private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested.
- less personal financial exposure
- limited liability protection
- involves set up costs
- annual accounts and financial reports must be placed in public domain
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