Choosing a legal structure for your enterprise

How well do you know about the legal structures that apply to businesses? Not much? Well don’t worry, you certainly aren’t alone. That’s why we have created this handy guide to all things business structures.

So, you’ve done your market research, you have a water tight business plan and your cash flow forecast is worked out to the nearest pence. Basically, you’re ready to go – or are you?

The next step is choosing the structure that will dictate your legal and fiscal responsibilities.  Getting this right from the outset can save you a lot of hassle later on but PLEASE don’t worry, you can change your structure as you grow but being educated and mindful of what your choices are are skills you should master.

So what are the most commonly chosen business structures?

Sole Trader

A sole trader is considered to be ‘self-employed’. This means you must register with HM Revenue & Customs (HMRC) for self-assessment as soon as you start trading. Being a sole trader means that you run your own business as an individual and are essentially self-employed. This is the most popular way of trading in the UK.

A sole trader is responsible for running their business and for meeting the legal requirements that come with it. As a sole trader, you can keep your profits after tax; however, you are also personally responsible for any debts of your business. A sole trader can employ or contract out staff.

If you’re a sole trader, you need to pay income tax and National Insurance subject to thresholds for profit generated.

You can submit your tax return online or through a paper application.

HMRC has short videos around different areas of tax, and there’s GOV.UK guidance on setting up as a sole trader.

Partnership

You and your partner(s) personally share responsibility for your business. Partners share the business profits, and each partner pays tax on their share.

A partner does not have to be an actual person. For example, a limited company counts as a ‘legal person’ and can also be a partner.

When you set up a business partnership you need to:

The ‘nominated partner’ is responsible for managing the partnership’s tax returns and record keeping.

A partnership agreement document outlines the liabilities, ownership, how profits of the business are split and what happens if one partner wants to leave. Each partner must register as self-employed and submit a separate tax return.

In a standard partnership all partners are fully responsible for all debts owed by the business.

Find out more about how to set up a business partnership.

Limited liability partnership (LLP)

In this legal structure, the number of partners is not limited, but at least 2 have to be ‘designated members’ responsible for filing annual accounts.

Just as with a limited company the LLP model protects its members’ assets, limiting their liability to however much they have invested in the business and any personal guarantees they may have given when raising loans.

As in an ordinary partnership, the members’ share of profit is taxed as income – each member must register with HMRC as self-employed. LLPs must also register at Companies House and there should be a members’ agreement stating what share of the profit each member should receive.

For more information on setting up and running an LLP, read the Companies House guidance.

Incorporating a limited liability company (Ltd)

A private company is incorporated and limited by shares. This means that the company has shareholders and the liability of the shareholders to creditors of the company is limited to any money they originally invested. A shareholder’s personal assets are protected in the event of company insolvency, but money invested in the company may be lost.

A company limited by guarantee must have at least one director and one guarantor. An individual may assume both positions, or there can be multiple directors and guarantors.

Company directors run the company on behalf of the shareholders. You can be both.

Limited companies must pay an application fee and be incorporated with Companies House. You can register online. You’ll need:

  • the company’s name and registered address
  • at least one director
  • at least one shareholder
  • details of the company’s shares
  • rules about how the company is run – known as ‘articles of association’

Companies House has further guidance on incorporating a limited liability company.

There are other business legal structures, including community interest companies and co-operatives and franchises. 

If you would like help with these please reach out to one of our mentors or business coaches who would be more than happy to discuss what’s right for you and your enterprise, like we said, getting this right from the outset is just one more positive action that can help ensure a strong and resilient business.