We’ve all heard of business partnerships, limited companies and going self-employed, but what exactly do these terms mean, and how could they apply to you and your new business? Does choosing the right business structure actually matter when setting up a business, or will your offered service/product and hard work alone be the key to your success?
Of course, your service/product, dedication and commitment are all absolutely key to how successful your enterprise will be as a business owner. But what most entrepreneurs fail to mention is that choosing the right business structure could help smooth the way for you, and allow you to avoid unnecessary obstacles and unproductive work and costs, really giving your enterprise a turbo-charge towards stability and growth.
Limited Liability Partnership (LLC)
Sole traders
So let’s dive in, and take a look at the simplest structure, which is perfect for a brand new business for solo entrepreneurs at the start of their journey: the sole trader. By setting up as a sole trader, you’ll be starting out working for yourself, with just the bare essentials, a basic business plan, and likely no employees. The good news is there are a lot of advantages of being a sole trader, you can avoid the costs and red tape of things like registering a company or finding a unique company name (you can trade under your own name without registering it). You don’t need to appoint company directors either – so it’s the perfect option for independent-minded people, who prefer a no-fuss approach.
Advantages of being a sole trader
This structure is all about getting individuals working for themselves, with the minimum of setup and administrative burden. It’s also worth noting that you don’t need to pay corporation tax – 100% of your profits (after your income tax and National Insurance) are yours outright – no shareholders, no fuss.
Disadvantages of being a sole trader
The flip side of this freedom is that you bear the full legal and financial responsibility for your enterprise, and its activities and debt. If the worst were to happen, and your business went under, as a sole trader, all of the debt incurred by your business is directly payable by you – and that could mean bailiffs coming to take away your sofa, or repossess your home if your business owes more than you’re personally able to cover.
If your line of work is likely to entail medium to large financial commitments or comes with too high a risk for you to accept, then it’s safe to say that a different business structure is probably more suitable for you (read on to find out which one!).
Partnerships
If you were to choose to go down the partnership route, this would bear some similarities to the sole trader setup in terms of the personal responsibility/accountability – except that each partner would be responsible for any actions within the business taken by either of them. This is the case whether or not they were aware of, or agreed, to them. It’s also worth noting that your nominated partner can be a company, as well as a person.
Points to consider
1. If you’re thinking of going into partnership with a family member, friend or colleague, you’d be well advised to make 100% sure that you know all their deep dark secrets – things like their personal and business ethics, as well as past examples of reliability – as well as knowing first hand how they react under stress or pressure. It would be wise for you to ensure that you’re looped into business decisions taken by the other person and that you’re on the same page on your approach from the get-go.
2. A popular way to make sure that you’re both singing from the same songsheet is to draft a Partnership Deed. Having this document is a great way for partners to clearly set out the terms of their partnership – the rules and practices they both agree to abide by, which form the foundation of any good partnership. It clearly sets out things like partnership profit shares, the process for new partners to be brought in (or resign), roles and responsibilities, how disputes would be handled, and working practices.
This may feel a little uncomfortable to discuss in practical detail with your new partner, but reaching a practical agreement around these approaches can only strengthen any partnership that has a good foundation. And remember, discussing a difficult or awkward possibility does not mean either of you think it will happen, but it does show your willingness to tackle those difficult subjects and figure them out together.
Positives of entering into a partnership
Shared liability equals lower personal risk
One aspect worth bearing in mind for partnerships is that there would be at least two of you sharing liability. So that would mean less of a risk to you personally, overall.
Strength in numbers
There is also a strength in numbers due to a greater range of skills and strengths brought to the table. The practical aspect of each partner taking on different workloads which fit best within their own comfort zones means that for people who are more specialist and less generalists, finding a partner with complementary skills and outlooks can ensure that your business is a lot stronger and more robust. It’s a great way to be able to ensure that you don’t get tunnel vision and that each of you fills the gaps left by the other’s blind spots. For people who really gel and work awesomely as a team, as well as those who work better with others rather than solo, this really can be an excellent option!
Tax requirements
As with sole traders, a partnership does not have to pay tax in its own right, as it is not a limited company. Instead, the partners each pay tax on their share of the profit received. Each partner registers separately with HMRC (by 5th October in the partnership’s second trading year, at the latest), as self-employed. They each submit their personal accounts, as well as filing accounts for the partnership itself. This will include business expenditure, income and expenses. Each partner also needs to pay their own National Insurance.
This can all be done online with HMRC, and the process is quite straightforward. Just remember to keep records of your incomings, expenses and tax-deductible business expenditure from the start, and the process will feel a lot more stress-free!
Taking on staff
A partnership (or indeed a sole trader) may choose to take on extra team members, particularly if the business is growing and needs extra resource, or indeed if there’s a skills gap which can’t be filled by either partner, due to resourcing stretch, or areas of expertise. This is by no means something to consider as a failing – no-one can do everything in a growing and successful business, and delegation is one of the hallmarks of a great leader. If you do employ someone, you’ll need to ensure that you understand and meet your responsibilities as an employer, both in terms of looking after your staff members, and fulfilling your legal obligations. If this isn’t your forte and you can bear a little extra expense to hand this over to someone else, it may be worth calling in the experts, and engaging the staff you need via a reputable employment agency.
Limited Liability Partnership (LLP)
LLPs may sound as though they’d be similar to a business partnership, but in fact, the structure and setup requirements is a lot closer to a limited company. With requirements like registering a company name, having a registered business address or home address (which will be made publicly available), and requiring a minimum membership of two “designated members” taking legal responsibility for things like filing the annual accounts with Companies House, you’d be forgiven for thinking that this is a limited company in all but name.
Key differences between an LLP and a limited company:
The positives
Crucially, an LLP can be set up very quickly (by a process called “registering”) and you can do it yourself, electronically. gov.uk estimates that it takes 24 hours for an LLP to be registered, via 3rd party software, or that it can even be completed the same day, via a premium service. Once registered, you’ll receive a certificate of incorporation.
Similarly to a limited company, members of an LLP are not financially or legally responsible for the partnership, and they all pay tax individually on their own share of the profit.
The negatives
Designated members who fail to meet their legal obligations are liable to prosecution, and the LLP can also be removed from the register.
Private Limited Company (Ltd)
A private limtied company is ideal for sole traders or partnerships who have reached a certain size or profit margin. For businesses where risk and business expenditure are at a higher level, setting up a limited company is likely to be the preferred option as well.
Overview
In a nutshell, when a company comes into being, it’s like a person. You pay tax for it, and it bears responsibility for financial and legal requirements, so your own possessions and finances are not at risk if the business fails.
Different types of private limited company
A limited company can be either “limited by shares” (it has shares and shareholders) or “limited by guarantee” (it has guarantors, and a “guaranteed amount”). The main difference here is that if a company is limited by shares, it’s able to keep 100% of the profit it makes (after tax), whereas companies who are limited by guarantee are not for profit, and re-invest any profit they make back into the business.
Setup requirements for a private limited company
One of the first steps in setting up your private limited company is selecting and registering a company name. There are requirements for what’s allowed, and you’ll need to check your prospective company name with Companies House. Luckily, there’s a handy company name availability checker online that you can use.
Bear in mind that if you want to include the word “accredited” in your name, you’ll need to obtain permission from BEIS. When it comes to trademarks, these will also need to be registered and need to conform to certain rules as well. Trademarks are registered via the Intellectual Property Office, and this is a separate process from registering your company’s name.
You will need to draft two documents called Memorandum of Association and Articles of Association. The MOA is the legal document which all the initial shareholders sign, which states that they all agree to form the company. The Articles of Association sets out the rules of the company, which the shareholders and directors sign, to formally agree to them.
Which brings us nicely to…
Company directors
You will need to appoint at least one company director, who has legal responsibility for things like filing your annual returns, paying corporation tax for the company, and keeping the company’s accounts. The actual administrative work around this can be carried out by another person, but it is the company director who is legally responsible for them being carried out properly. You can also appoint a company secretary to take on some of the director’s legal duties, but unlike the company director, having a company secretary is optional.
Basic process to set up your private limited company
Once you’ve prepared the necessary documents, checked what records you need to keep, and appointed your directors, shareholders etc, the next step is choosing your SIC code (standard industrial classification of economic activities) which identifies what your company actually does. The next step is then registering with Companies House, either directly or through a company formation agent. Conveniently enough, you can generally register for corporation tax at the same time.
Choosing the right business structure
So here you have it, the main characteristics and requirements for three different UK company structures in a nutshell. Whichever structure you choose, we hope you’re now confident in choosing the right business structure for you and are all set to take your next steps in launching your new business!