Deciding to launch your own business is a tremendous step and an incredibly exciting thing to do. Letting go of a steady salary is not for everyone and you can feel proud that you have joined the ranks of the 15% of the UK working population courageous and creative enough to go it alone.
Of course, launching a start-up in any sector has risk, but there are several steps you can take to mitigate any pitfalls.
One is to choose the right legal structure for your business. In this article, we will explain the most common business legal structures in the UK and the advantages and disadvantages of each. And remember, it is always sensible to get advice from a Commercial Solicitor, who will advise you on what structure is best for your short and long-term ambitions, organising any necessary paperwork.
The business legal structures discussed in this article are:
- Sole trader
- Traditional partnership
- Limited Liability Partnership (LLP)
- Private Limited Company (PLC)
Let’s look at each business structure in detail.
Sole trader
Setting up as a sole trader is the quickest and simplest way to establish your own business. All that is required is to register as a sole trader with HMRC and fill in an annual self-assessment form. Income tax is paid on any profits you make. Once you hit a certain threshold (turnover in excess of £x per annum), you will also need to pay National Insurance (NI).
Advantages of a sole trader
- You can employ other people
- Your business accounts remain private
- Little red tape
- You keep all the profits, less tax
Disadvantages of a sole trader
- You're personally liable for any business debts and contractual obligations
- Some suppliers will be reluctant to enter into a contract with you
- There is no straightforward structure to allow for third-party investment
Sole trader structure is best for...
People looking to have a lifestyle business, i.e. the profits are used to pay personal expenses such as their mortgage, bills, etc rather than being invested back into the business and have no expectation to expand beyond one or two employees. There are approximately 3.5 million Sole Traders in the UK.
Traditional partnership
If you plan to go into business with others, you can consider entering into a partnership. Traditional partnerships (or ordinary partnerships) are taxed in the same way as a sole trader (on profits) and there is no upper limit to the number of partners who can join the organisation.
Advantages of a traditional partnership
- Easy to set up and highly flexible
- Company accounts don't have to be published
Disadvantages of a traditional partnership
- Each partner is jointly responsible for business debts and contractual commitments
- Disagreements regarding the running of the business, sharing profits, and growth targets can escalate and cause the Partnership to break down
Traditional partnerships are best for...
Two to five people who want a business that will tend to grow organically, rather than through third-party investment.
Warning – Traditional partnerships are governed by the Partnership Act 1890. As you may well guess, an Act passed in the reign of Queen Victoria is not exactly tailored for businesses set up today. Therefore, it is essential that you have a Partnership Agreement drawn up which sets out:
- The amount of capital contributed by each partner
- How profits will be shared
- The responsibilities and duties of each partner
- What happens if one of the partners resigns, retires, or dies
- How disputes will be resolved
The above is only a small sample of what a Partnership Agreement should establish. A commercial solicitor will advise you on any other terms that should be included, based on your business and market sector.
Limited Liability Partnership (LLP)
Popular with professionals such as lawyers, accountants and architects, an LLP is similar to a Partnership, but the liability of each partner is limited. The LLP must be registered with Companies House and a minimum of two partners must be listed as responsible for filing the annual accounts.
Advantages of a LLP
- Similar to a traditional partnership, each partner registers as self-employed and files their own tax return
- Each partners’ liability will be limited to the value of their share in the partnership
Disadvantages of a LLP
- The business accounts will be available at Companies House for anyone to view
- More paperwork is required so it may be necessary to employ a person to manage the partnership’s administration
LLPs are best for...
Larger Partnerships, supplying professional services.
Private Limited Company (PLC)
A Private Limited Compant (PLC) is a completely separate entity from the people who established it. This means it can enter into contracts, buy property, and take on debt in its own name. A company is owned by shareholders who are not personally responsible for any liabilities incurred by the business - unless of course they have given some form of guarantees or have traded in a way deemed to be contrary to company law.
Advantages of a PLC
- Shares of the company can be sold to third parties, making it easy to attract investment
- Corporation tax applies , which is at a rate currently lower than the higher levels of income tax
- A Shareholders Agreement can set out how the company will be run, the payment of dividends, and how disputes will be resolved
Disadvantages of a PLC
- Your accounts are available to the public via Companies House
- There is a good deal of administration involved in setting up a company and filing annual accounts
PLCs are best for...
Those who have ambitions to run a tax efficient business, maintain a separation between personal and business assets, provide share ownership to key personnel and attract outside investment to grow their business. There are nearly 4 million limited companies incorporated in the UK, with over 500,000 added every year.
Free Shareholders Agreement template
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It's important to take the time to choose the right legal structure for a start-up. You may find that you start as a sole trader or partnership, but as the business and your commercial ambitions grow, it makes sense to form a limited company.
The best way to work out what legal structure is right for your new venture is to talk to an experienced commercial solicitor. They will also be able to advise you on the essential contracts you will need and any other legal points you should consider to protect your best interests. To find out more about choosing a strucutre for your business book a free 15 minute consultation with one of our expert lawyers or call us on 020 3808 8314.
