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Choosing the right business structure for your company

Choosing the correct business structure for you and your business is hugely important; this is because the structure you pick will determine the legal obligations on both you and your business. There are pros and cons to each structure and the structure you choose will determine your personal responsibilities, how profits are distributed and the tax liabilities.

This overview focuses on the four main types of business structure in the UK: sole trader, general partnership, limited liability partnership and limited company; each of which has various tax and liability implications for owners and shareholders.

Sole trader

A sole trader is a simple form of business structure where the business is owned and operated by a single person. Sole traders are viewed as being self-employed, however, they can employ staff.

Any profits made by sole traders are entirely their own. The key distinction from other business structures is that they are also personally liable for any losses and debts of the business, and without limit. This is because the business and the individual are viewed as one entity for legal purposes. Sole traders are taxed on their income and must file a tax return with HMRC each year.

This business structure is easy to set up and is a low cost option because it only requires one individual. There are no registration requirements at Companies House

There is a lot of reliance on the sole individual so it is advisable to have a lasting power of attorney in place to ensure the continuity of your business in the event that you are incapacitated. This is something we can help you with.

This business structure is often used as a starting point for businesses; as the business grows, you may wish to transition into one of the business structures listed below.

General partnership

A general partnership involves the sharing of responsibility for a business between at least two partners. Generally the individual partners, not the limited partnership, pay tax on income or gains.

A general partnership does not have a legal personality separate from its partners. A general partnership cannot own assets in its own right, nor can it grant security over them.

Partners are jointly responsible for the contractual debts of a partnership, meaning that if one partner has incurred debt, all partners could be held accountable. We therefore strongly advise the partners to have a Partnership Agreement in place that will govern the way that liability, profits and ownership are split between the partners and will enable recovery from all partners if one is held liable. This is something that the LCF Law corporate team can prepare in conjunction with all the partners in order to provide clarity, certainty and peace of mind.

There is no requirement for general partnerships to register with Companies House although there are requirements to register with HMRC.

Limited liability partnership

A limited liability partnership, unlike a general partnership, has a separate legal personality to that of the individual partners. It can hold its own assets and grant charges over them; and it can enter into contracts in its own right. This key difference makes it an attractive option as each partner’s liability is limited to the amount they have invested in the business; and any personal guarantees they may have given on the back of partnership loans.

A key document for a limited liability partnership is an ‘LLP Agreement’ which is used to govern things such as the profit split between partners; who is responsible for management and how decisions are made; the responsibilities of each partner; when and how new members are appointed; and the circumstances in which members retire.

Generally the individual partners, not the limited partnership, pay tax on income or gains. A limited liability partnership must register at Companies House.

Limited company

A limited company is a body corporate and has a separate legal personality from that of its shareholders. A company holds its own assets and can grant charges over them. A company enters into contracts in its own right and can, therefore, sue and be sued on those contracts. A limited company must have at least one director who is a natural person - essentially a real individual rather than a legal entity - but there is no statutory upper limit to the number of directors the company can have. A company limited by shares must have at least one shareholder, who can also be a director.

The main benefit of the limited company business structure is that it limits the liability of the owner to the amount they have invested into the company.

All companies must have articles of association which set out the basic management and administrative structure of the company. The articles are a public document and must be filed at Companies House. Our corporate team at LCF Law can help you by preparing bespoke articles of association that best suit your business needs.

In addition to the articles of association it is common, and recommended, to have a shareholders’ agreement in place. A shareholders’ agreement is a contract between the shareholders of the company and, unlike the articles of association, it is not a public document and does not need to be filed at Companies House. It regulates the rights and duties of the shareholders and governs the affairs of the company. It typically covers rules on transferring and issuing new shares as well as a list of matters that require shareholder approval. It is a very useful document that helps provide certainty and clarity for the shareholders and is something our corporate team at LCF law can prepare for you.

The vast majority of companies registered in the UK are limited by shares. However, there are also companies limited by guarantee. Companies limited by guarantee are normally incorporated for non-profit making functions; they have no share capital and they have members rather than shareholders.

As, technically, the limited company holds the profits, the most popular method of a company returning value to its shareholders is through a dividend payment, which is a distribution of a company's post-tax profits to its shareholders.

The profits of a company are subject to corporation tax. Directors will need to pay tax and NIC through the PAYE system if they are paid an annual salary, as well as completing a self-assessment tax return.

A limited company must be registered at Companies House and there is a duty to file annual accounts.

At LCF Law our corporate team can provide you with clear, commercial advice on the best way to establish your business from the outset; taking into account personal circumstances, the business dynamics and risks; and the likely future development of the business and the people linked to it. This can include the associated liabilities and obligations involved including: tax, reporting, making business changes and more. We have considerable experience of each type of business structure - from one-man-bands to large corporations - in operation across multiple market sectors. We know the pitfalls and issues to watch out for as well as the various advantages of each structure. Putting in place the right structure from the outset can save a business considerable time, money and hassle as it grows and develops.

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