Your business’s legal structure will determine how it grows, pays taxes, makes significant decisions, and handles liabilities. That’s something you decide at the beginning, but you can change it later if it becomes beneficial. You can set up and run your business in the UK in a variety of ways.
There are several options. All of which have advantages and disadvantages in legal and taxation terms – but your four main options are as follows:
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These business structures have advantages and disadvantages, based on several factors such as your business size, nature, and plans for the future.
1. Sole trader (‘self-employed’)
A sole trader is also known as being self-employed. The sole trader structure is one of the most common and most straightforward.
A sole trader establishes and owns their business; they receive the rewards and benefits but are also subject to unlimited liability. The sole trader has unlimited liability, which means they are personally liable for all of the business’s liabilities and losses.
A sole trader business is the quickest, easiest, cheapest, and most straightforward method of starting a business. You must register your sole trader business with HMRC by the 5th of October; otherwise, you may be fined.
Advantages and disadvantages of a Sole trader
| Advantages | Disadvantages |
One of the main benefits of operating as a sole proprietor is easy setup and administration. | Difficult to add new business partners. |
| HMRC’s taxpayer confidentiality rules protect it. | Challenging to maintain Employee ownership in the business. |
| Cost-saving as there are no formation fees and less expensive options for accounting services. | Unlimited liability – Putting your personal property and possessions at risk. |
| Winding up a sole trader is a fairly simple process, though it can be difficult if you have debts that you cannot repay. | You may have to work extra hours/ weeks to succeed in your business. |
| You have complete control over how your business is run and managed. You are in charge of making decisions. | Personal and business finances are not separate, and 100% of the profits are taxed. |
2. Partnership
A partnership is a form of business ownership in which two or more people pool their investment and knowledge to form a business.
Like a sole trader, each partner would enjoy the benefits and rewards of the business but would also be liable for liabilities and losses, including those of Limited partners (sleeping partners).
Advantages and disadvantages of a partnership
| Advantages | Disadvantages |
The benefits of a partnership include flexibility and simplicity and the added benefit of having more owners to run the business. | The liability of a General Partnership is unlimited. |
| A General Partnership has reduced startup costs and requires little administration. | Disagreements between partners pose a risk. |
| The general partnership’s business affairs are kept private. | Partners joining or leaving the partnership will necessitate a valuation of the partnership assets, which may incur additional fees with the accountant. |
| Individual workloads can be reduced by assigning tasks based on skills. | Future business growth may be hampered by unlimited liability and limited capital. |
| Partners share decision-making, which can be advantageous because there are more brains to choose from. | All partners are equally responsible for business debts. |
3. Limited liability partnership (LLP)
In a nutshell, this structure has many of the same features as a traditional partnership, such as internal management, tax liability, and profit distribution.
Still, it also has the limited liability of an incorporated company. Professional service firms, such as solicitors and architects, frequently use limited liability partnerships.
Advantages and disadvantages of an LLP
| Advantages | Disadvantages |
LLPs are not taxed as corporations; hence they do not pay corporation tax. | Like a general partnership, separate accounts are maintained. |
| Each LLP partner registers as self-employed and files a separate tax return. | More regulations are required to be followed. |
| An LLP’s internal structure is just as adaptable as a traditional partnership, allowing for changes to rights and responsibilities as needed. | The administrative burden of an LLP is comparable to that of a limited company; the services of accountants in London and a company secretary may be beneficial. |
4. Private Limited Company
In the United Kingdom, the most popular form of incorporation is a Private Limited Company (Ltd company).
The company is formed through Companies House with at least one share, one Director and no minimum capital requirement. The shareholders own the company.
Because an Ltd company is a separate legal entity from its shareholders and directors, personal assets are not at risk. Only in the event of fraudulent or wrongful trading would the Director be held liable.
Advantages and disadvantages of an Ltd Company
| Advantages | Disadvantages |
The liability of an Ltd company is limited to the amount invested in the company. | The fee of £13 for company formation is due. |
| Contributing to a pension has significant tax advantages for owners. | Annual accounts, confirmation statement and the annual tax returns must be filed with HMRC and Companies House. An accountant can help you deal with this. |
| Increased credibility and reputation | Accounts are available on the Companies House website, which is open to the public. |
| Easier to have employees share ownership | |
| Easier to add more shareholders and investors to the business |
Winding up
There are numerous options to consider when starting a business, and there is no one-size-fits-all solution. Inquire with your accountant about the best structure for your firm at its present stage of development.
