Setting up a business can feel complex and overwhelming at the best of times. The first choice you are face with is what type of business structure you’re going to register as.
It follows that knowing about the different legal business structures isn’t just about business acumen, it’s about knowing what options are available to you and why they’re different. Different types of legal entities in the U.K. match different businesses, and the one that’s most appropriate for your business will depend on your particular context. With this article, you’ll gain an understanding of the four main types of business structure in the U.K. and each of their particular advantages and disadvantages.
What is ‘business structure’ and why is it important?
‘Business structure’ doesn’t refer so much to the organisation of your business, but rather its legal personality. Your choice of business structure will influence your tax and legal liability, finances, and your business’ growth trajectory.
How do I choose the right U.K. business structure for my business?
Faced with the different types of legal business structure, you may have no idea where to begin. Here are some of the factors that should influence your decision:
- How big your business is
- What kind of business you’re doing
- How many people you employ
- Your liability and personal risk
- Whether its preferable for you to pay income or corporation tax
- Whether you’re in a business partnership
- Whether you have shareholders
Types of Business Structures in the UK
There are four main types of company structure in the U.K.:
1. Sole Trader
Being a sole trader is the same as being ‘self-employed’. It means running your own business as a freelancer or contractor. You’ll need to register as a sole trader with HMRC and complete and submit a self-assessment tax return.
You are allowed to have employees, but bear in this mind that this comes with additional responsibilities.
A ‘sole trader’ business structure is one of the most common business structures in the U.K, especially for newer businesses. It is simple to set up and there are no upper limits on how much profit you’re allowed to make. You pay income tax not corporation tax.
Note, however, that your business does not exist as a separate legal entity to you, leaving you open to unlimited liability if someone files a claim against your business, or if you fall into debt. In addition, you are responsible for the running of your business and compliance with any legal regulations.
Advantages of registering as a Sole Trader:
- Easy and simple to set up
- Low administrative load (all you need to do is submit your self-assessment tax return)
- You retain full control over your business
- Fewer regulations that you need to comply with
- There are no registration fees
- No upper limit on your profit
Disadvantages of registering as a Sole Trader:
- Full liability and therefore more risk
2. Partnership
A business partnership is exactly what it sounds like. You and a partner(s) run your business together, and therefore share responsibility over it. You’ll all pay tax on your share of the business.
You’ll need to prepare a detailed partnership document that outlines the responsibilities and liabilities, how the ownership of the business is divided, how the profits are split, and an exit procedure should a partner want to quit. All partners will need to register as self-employed and as above, will have to submit a self-assessment tax return.
As above, all partners will have shared liability for any of the business’ debts, losses or negligence. When you register with HMRC, you’ll need to choose a business name together, and then choose a nominated partner who will be responsible for all administrative responsibilities.
Advantages of registering as a Business Partnership:
- Easy and simple to set up
- Higher chances of raising finances
- Works well if your business is owned by more than one person
Disadvantages of registering as a Business Partnership:
- All partners have liability for any claims brought against the business, meaning you all carry personal risk
3. Limited Company (Ltd.)
Registering your business as a limited company limits your legal and financial liability in relation to the business as your business will become a legal entity that is separate to you. It must have at least one director who is over 16 years old and have a registered company office in the U.K. Finally, you need to issue at least one share when you incorporate your business.
You’ll need to register your business with Companies House, pay corporation tax, submit your annual reports to HMRC and Companies House, and designate a director or board of directors.
In fact, some business owners opt to register as a Limited Company over Sole Trader even if they run their business by themselves. They simply appoint themselves the director of the company. The primary reason for this is the limited liability and reduced personal risk.
The business director will be responsible for completing all administrative tasks, carrying out an annual audit, and filing company accounts each year.
A Limited Company has its own bank account and has to pay corporation tax, with no tax-free allowance.
Advantages of registering as a Limited Company:
- The business has a separate legal personality therefore limiting your own personal liability
- Depending on your income, corporation tax might make more sense
- The requirement to file information on your company strengthens transparency and your reputation
Disadvantages of registering as a Limited Company:
- There are some fees associated with registering as a Limited Company
- You’ll take on additional administrative responsibilities
- Your annual accounts and financial reports will be in the public domain
4. Limited Liability Partnership (LLP)
This is where you’re in a business partnership with at least two partners. Again, you have limited liability for business legal claims, as well as limited liability against other partners. Each partner’s share of the profit will be taxed as their income. All partners have to register as self-employed with HMRC.
You still need to register with Companies House, pay Corporation Tax and Submit annual reports with Companies House and HMRC and you’ll have to submit an annual company tax return.
Advantages of registering as a Limited Liability Partnership:
- You are not liable for the negligence of your partners
- Depending on your company’s income, paying corporation tax might make more financial sense than income tax
- You get the ‘best-of-both’ worlds: the advantages of both a limited company and a partnership
Disadvantages of registering as a Limited Liability Partnership:
- Some fees associated with registering as a Limited Liability Partnership
- Each partner will need to disclose their income
- There are additional administrative responsibilities that you’ll take on
FAQs about Types of Company Structures in the UK
1. What defines a sole trader? And is there a difference between self-employed and sole-trader?
A sole trader is someone that runs their own business, is self-employed, and has registered as a sole-trader.
The difference between ‘sole-trader’ and ‘self-employed’ is nuanced. Sole trader is a title of a business structure. If you’ve registered as a Sole Trader, you’re also self-employed.
‘Self-employed’ refers to how you operate and work, rather than being an official title or structure. As a self-employed person you can also be employed by a third-party.
2. What are examples of sole traders?
Freelancers such as freelance designers, copywriters, and photographers are all good examples of sole-traders. People working in the gig-economy (think independent tutors) are also sole-traders.
3. What is the difference between private and limited company?
A limited company can actually be either public or private. A private limited company doesn’t publicly trade its shares and can only have a maximum of 50 shareholders.
4. What is a partnership business example?
The perfect example of a partnership business is a law firm!
Although all these types of business structures in the U.K. seem complex, they don’t have to be. Equipped with a basic understanding from our guide, we hope you’re able to identify the most appropriate business structure for your particular situation and remember that you are best to plan ahead and choose the structure that fits your long term needs as changing structures down the line isn’t simple and may have tax implications. If you’re in need of some legal oversight or guidance with registering your business, our first-class lawyers are here to help. Get in touch today to discover how we can help you and your business.
Read more in detail about setting up a company in the UK