The UK has several options for structuring a business. The four main types of company structures are Sole Trader, Partnership, Limited Company, and Limited Liability Partnership. Each has advantages and disadvantages regarding control, liability, taxes, and administrative requirements.
Sole Trader
A sole trader is the simplest business structure in the UK. It refers to a business that is owned and run by one person. The sole trader is entitled to all business profits but also has unlimited liability for its debts.
The advantages of being a sole trader include full control over decision-making, minimal set-up requirements, and low compliance costs. You can get started quickly without formally registering the business. Sole traders also benefit from simpler accounting and tax filings. You report business profits on your personal tax return.
However, the sole trader has unlimited liability, which means your personal assets are at risk if the business gets into debt and is sued. Raising finances can also be difficult if no one shares the risk. The business ends if you become ill or want to retire.
Partnership
A partnership is formed when two or more people go into business together. The partners share control based on their agreement and ownership share. Profits are divided between partners who are then taxed separately.
Partnerships allow skills, investment, and risk to be shared. The administrative burden is divided among partners. However, partnerships can suffer from disagreements between partners. All partners have joint unlimited liability for debts, which means their personal assets are at risk. The partnership may have to end if a partner dies or leaves.
Setting up a partnership is easy and inexpensive. You need a partnership agreement to outline profit/loss distribution and partner roles and duties. You must register for taxes, but there is no need to file annual accounts.
Limited Company
A limited company is a separate legal entity from its owners. This provides limited liability meaning the owners’ personal assets are usually protected from business debts and liabilities. Losses are borne by the company.
Limited companies allow ownership transfer through share sales. Raising finance is easier by issuing shares. Company profits are subject to UK corporation tax. Owners’ income is paid through salaries and dividends which are taxed under the income tax system.
Setting up a limited company involves more regulatory requirements. You must register at Companies House and set up statutory accounts, company tax returns and hold AGMs. Compliance costs are higher.
There are two types of UK limited company – private limited and public limited. Private limited companies cannot sell shares to the public while public limited companies can trade shares on public stock exchanges.
Limited Liability Partnership
A limited liability partnership (LLP) allows the limited liability benefits of a company with the flexibility of a partnership. LLP owners have limited liability for debts. An LLP is tax transparent – income and expenses pass through to partners who pay tax on their share of profits.
Forming an LLP involves registering with Companies House and submitting annual accounts. However, there are fewer reporting requirements than a limited company. Ownership is transferable by members selling their interest.
LLPs allow members to actively manage while limiting their liability. They provide flexibility similar to a partnership with lower administration costs than a company. However, LLPs lack the branding and finance raising abilities of companies.
Choosing Your Business Structure
There are benefits and drawbacks to each UK business structure. Key factors to consider are control, liability, taxation, setup, and compliance requirements.
Sole traders and partnerships are easy to establish with few formalities. But the owners have unlimited liability. Limited companies provide limited liability but have more regulatory requirements. LLPs are a hybrid offering limited liability with partnership flexibility.
The business aims, size, and ownership structure influence which type is most suitable. As the business evolves, it may be necessary to transition to adapt to changing needs. Businesses should weigh the pros and cons of each structure carefully. Professional advice can help select the optimal company structure.
