Structuring your business in the UK: What are the options?

Beginning the journey with your new start-up brings much excitement and plenty of challenges. One of the early questions is what business structure should you use?

The structure you choose will have significant implications on tax, personal liability, administration and finance. The wrong set-up may result in complications, requiring extensive advice (and expense) to sort out later.

What are the different types of UK business structures?

Sole trader

The simplest and easiest to register.

Sole traders are self-employed and must be registered with HMRC.  As a sole trader, you run the business.

You are entitled to keep profits as income but will be liable to pay tax and national insurance by filling out a Self-Assessment Tax Return.  There is no maximum amount you can earn, but it can become less tax efficient in the higher tax brackets.

You will be responsible for all liabilities.

Partnership

A Partnership involves two or more individuals that agree to share in the profits or losses of the business.  They share the risks, costs, benefits and responsibilities of running an organisation.  The partners are self-employed and are personally responsible for the losses or debts that the business undertakes.

Each partner is also responsible or liable for the other partner’s negligence or misconduct.  The profits or losses from a partnership will be shared between the partners.  This will be in the agreed profit sharing ratio and each partner pays tax on their own share of the profits.

Limited Liability Partnership (LLP)

An LLP is similar to a partnership except that the partner’s liability is limited to the amount of money he/she invests in the business. The LLP must be registered at Companies House and with HMRC. Annual accounts must also be filed.

An LLP can be incorporated with 2 or more members and a member can be an individual or a company.  Members’ responsibilities and share of profits are set out in an LLP agreement.

All members must submit a personal Self-Assessment Tax Return every year, pay income tax on their share of the LLP’s profits and pay National Insurance to HMRC.

Limited Company

A limited company is a privately managed business, owned by its shareholders/members and run by its directors.  The company is a separate legal entity with its own legal rights and obligations. The company is responsible for everything it does and its finances are separate to the personal affairs of its owner(s).

Profits generated are retained by the company, after it pays Corporation Tax.  Only then can the profits be distributed to shareholders in the form of dividends.

Limited companies can be limited either by shares or by guarantee, plus they have annual reporting and filing requirements with both Companies House and HMRC.

The benefits of this are:

• Owners/directors decide on remuneration packages
• The business can retain profits
• Brand protection
• Business expenses can be claimed back through the Company

Limited by shares

Most limited companies are limited by shares which means each shareholder’s financial liability is limited to the amount that the shareholder has agreed to pay for the shares.

Private company limited by guarantee

A company limited by guarantee does not usually have share capital or shareholders, but instead has members who act as guarantors and each member’s liability is limited by a specified amount (often a nominal £1.00).

Incorporation

For both the sole trader and the partnership you don’t need to go through any formal processes to set the business up.  Neither of these requires the formation of a separate entity.  However, you will need to register with HMRC and comply with the applicable rules.

The formation of a separate entity required for a Limited Liability Partnership and a Limited Company is a more complex process. You will firstly need to register the company at Companies House and draft the company’s Articles of Association.

Conclusion

Choosing the right corporate structure for your business is a crucial decision that can significantly impact your operations, legal responsibilities, and growth potential. Each structure has its own advantages and disadvantages, so it’s essential to consider your specific business goals, financial resources, and risk tolerance.

If you would like to discuss the information outlined in this blog post, please get in touch with Calum Crighton by email or by phone at +44 (0)7841 920 101.