It's critical that you choose the correct legal structure when starting up as it will affect things like the tax you pay, registration and reporting requirements, and your personal financial liability.
Wanting to limit your personal liability for the debts of the business as well as the taxes you'll have to pay is a common goal for many new business owners. Having a good understanding of how to stucture a business, however, is not so common.
So, what are legal structures and what type(s) should you consider?
liability companies, sole proprietorships, and partnerships are some of
the more common options for business legal structures. There are
differences and similarities in each that can dramatically affect the
future of your company. Failing to structure your business in the most
appropriate way (given your goals) can lead to many bad outcomes
1. Higher than expected tax payments
2. Large amounts of administrative work and costs
3. Unexpected loss of your personal assets.
The most popular legal structures for start-ups are sole trader, partnership and private limited companies.
As a sole trader you work on your own. You don't necessarily have the responsibilities of employing someone else, although you can. It can be lonely, but a lot of successful business people have started out like this.
Being a sole trader is the simplest way to run a business - it does not involve paying any registration fees, keeping records and accounts is relatively straightforward, and you get to keep all the profits.
However, you are personally liable for any debts that your business runs up, which may make this a risky option for businesses that need a lot of investment.As with everything in life, there are reasons for and against working for yourself so it's important to take account of these before deciding whether self-employment is right for you.
If you want to set up as a sole trader our becoming self-employed page explains the benefits of being self-employed and how you can set up your business in this way.
A business partnership is the next logical step up from the sole trader. It is the simplest and least expensive co-owned business arrangement. The partners in an ordinary partnership are effectively self-employed people working together but independently.
A partnership is a trading status that is created automatically when two or more people start running a business, possibly sharing the workload and expenses and/or investing capital to get things going.
No formal agreement is necessary, but this is strongly recommended as a means of ensuring the future of the partnership and avoiding potential problems later on. People and circumstances change. A handshake and reliance on goodwill may not be enough to prevent disputes in the future.
This form of legal structure is often used by accountants and solicitors. The difference with an LLP is that the business, rather than the individual partner (member), carries the legal liability for its debts.
An LLP gives its members protection from personal bankruptcy and from the actions of 'rogue members' who act without the authority of the others, but the same tax advantages as trading as a partnership.
Its accounts will generally have to be audited and filed at Companies House.
A private limited liability company is a corporate organisation owned by its shareholders but which has a separate legal entity from its owners.
The legal structure of the limited company limits the shareholders' liability for the company's debt to any amount still owed for the shares they have purchased.
As most shares are paid for in full when they are issued, this normally means that the shareholders cannot be held liable for the company's debt and their personal assets are therefore safe.In the form of a dividend the shareholders share the profit generated through the company's operations. Shares cannot be offered to the public and there is no minimum share capital requirement.
Incorporating a business allows a number of other advantages such as the ease of bringing in additional capital through the sale of share capital, or allowing an individual to sell or transfer their interest in the business. It also provides for business continuity when the original owners choose to retire or sell their shares
A private company is an unlimited company if there is no limit on the liability of its members.
It may or may not have share capital.
Such companies are rare and usually created for specific reasons.
We strongly recommend that you take legal advice before creating one.
A public limited company (PLC) is similar in the way it separates its finances from those of its members, but a PLC must have the following:
• At least one shareholder
• Issued shares to the public to a value of at least £50,000 - or the prescribed equivalent in Euros - before it can trade
• Be registered (incorporated) at Companies House
• At least two directors, one of whom must be an individual of at least 16 years old
• A company secretary
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