What business structure to choose in the UK?

Why is choosing a business structure important?

When you choose a business structure, you are in a sense giving your business some level of organisation that enhances better management.

Choosing a legal business structure is also useful when registering with the government. Either or both HMRC and Companies House will want to know what your business structure is so that you can be taxed appropriately. For example, sole traders get taxed lower, at certain levels of income, than other business structures.

What are the different business structures?

There are four main types of business structures in the UK, although each many have different variants of it. The four main types are

• Sole Proprietorship.
• Business Partnership.
• Limited Liability Partnership, and
• Limited Liability Company (LLC).

Keep reading to find out more about each of these business structures and what you stand to gain or lose when you set up using any of them.

1. Sole Proprietorship.

This is probably by far the most common business structure today, and you can guess the reason why – freelancers and digital nomads fall under this category.

A sole proprietorship or sole trader is a business structure where the owner is the sole decision maker and answers to no one. S/he is the don of his or her business and gets to decide what happens to the company.
Legally, the company and the owner are seen as one and the same and can thus sue and be sued. This business structure does not need to register with Companies House but must register for Self-Assessment with the HMRC voluntarily or compulsorily when it starts making up to £1000 in profit.

Pros

• You make all the decisions regarding your business and answer to no one.
• You can employ staff to work with you.
• You keep all the profits in the business after tax.
• You do not need to register with HMRC unless you have started making up to £1000 per annum.
• It is easy to set up and at a low cost.
• No need to file annual accounts.
• Accounting can be done traditionally and easily.

Cons

• You bear all liabilities, i.e., loss or debt, on your own. No fallback.
• All your personal properties are fair game in a legal suit – you and your business are one legal entity.
• The death of the owner may mean the death of the business too.

2. Business Partnership.

The business partnership or simply partnership is another common business structure. In this case, you are going into business with another person or limited company, either of which is considered a legal entity. Just like the sole trader, a partnership needs only to register with HMRC for Self-Assessment too, no need to register with the Companies House.

When registering with HMRC, you should have a business name and a nominated partner. The nominated partner is responsible for tax filing and accounts management. Also, it is important to properly state in the business statements who bears what liabilities, ownership, profits, and what happens to the business in case of liquidation, insolvency, or a partner wants out. All these must be outlined succinctly.

Pros

• Easy formation and management
• Liabilities are not borne by just one person
• Easier to raise capital as opposed to sole trading

Cons

• Liabilities are borne by partners, i.e., the partners and their business are seen as one legal entity.
• The business may fail if partners disagree on something(s).

3. Limited Liability Partnership (LLP)

This business structure combines the attributes of a partnership and limited liability company.

Its attribute as a partnership is that its members can be as many as possible but at least two of them must be designated as managing members tasked with the responsibility of filing annual accounts.

On the other hand, its limited liability attribute limits the liabilities borne by each member to how much they contribute at the beginning of the partnership. Hence, their profits are paid to each member as income such that each member has to register to pay tax individually through the HMRC. However, the company itself must be registered with Companies House

Pros

• Liabilities are not borne by you alone
• There is a possibility for continuity in case of the demise of one of the partners

Cons

• Partners must declare their assets and income.
• Business must commence within a year of registration or be removed from the Companies House list.

4. Limited Liability Company (LLC or LTD)

A limited liability company is a company that is seen as a separate entity to its owners and can thus bear its own liability. An LLC can be limited by guarantee (CLG) or shares (LTD). The limited liability company must be registered with Companies House before the commencement of business and HMRC for the payment of corporation tax.

Before incorporation, the LTD must clearly state its director(s), shareholder(s) or member(s), directors’ and shareholders’ registered addresses, company’s registered address, company SIC code, PSCs, and SAIL address, etc.
The company must also have a memorandum and article of association, both of which clearly state their mode of operation and starting shares for each shareholder.

Pros

• Liabilities are borne by the company itself with the shareholders only bearing the liabilities for the shares they have at the incorporation of the company.
• The director and shareholder can be a single person so an individual can own a limited liability company.
• The company can be taken public to become a PLC (Public Limited Company) through an IPO (Initial Public Offering).
• It is easier to raise funds for the company because it has more credibility with financial institutions.
• The death of one director or shareholder does not mean the end of the company, i.e., there is continuity.

Cons

• Can be difficult to set up.
• Annual filing of accounts and confirmatory statements
• Accounting is not easy to do and requires the expert input of an accountant.

What are the factors to consider when choosing a business structure?

You should consider the following when thinking of choosing a business structure

1. Your financial strength. If your financial strength is not yet in favour of a limited company, you should consider starting out as a sole trader or partnership. It is easier to scale up – become a limited liability company, than scaling down to sole proprietorship
    
2. Continuity. If you want your business to have a long life, you should consider a partnership instead a sole proprietorship. Limited liability partnerships and companies can also exceed your lifetime if managed properly.
    
3. Liabilities. Depending on the nature of your business (especially the high-risk businesses like construction or health-related businesses), it may not be wise to bear all possible liabilities on your own.
    
4. Control. Setting up as a limited liability company may not necessarily mean you give up control of your company to some strangers. This is because you can be both the director and shareholder at the same time but the business is a separate entity to you. Hence, the business bears its own liabilities itself.
    

Conclusion

Making the choice of a business structure is as important as starting the business itself. It is therefore important that you outline the goals, both short-term and long-term, of the company before choosing the company structure that best suits you.