How To Choose The Right Business Structure

Choosing a legal structure is usually one of the first big decisions an entrepreneur faces when starting a new business, which can sometimes make the process feel overwhelming. In this article, we break down what it means to run a business under each different type of structure and outline the key aspects that influence an entrepreneur when making this important decision.

The 4 Main Business Structures In The UK

A business structure describes the legal structure of a company that influences the day-to-day business operations. The four main business structures in the UK are: sole trader, limited company, partnership, and limited liability partnership (LLP).

Sole Trader:

A sole trader, also referred to as a sole proprietorship, is a business owned and operated by a single individual, where there is no legal separation between the owner and the business itself. Typically, a sole trader is considered to be self employed and they must register for self-assessment as soon as they start trading.

Benefits -

1. Complete control

2. Simplified accounting / fewer tax responsibilities

3. Easy to set-up, no complicated legal structure required

Drawbacks -

1. The business owner has full liability for company debts and losses. Personal assets and property could be at risk

2. More difficult to raise finance

3. Profits subject to income tax

Limited Company:

A limited company, also referred to as a corporation, is recognised as a separate legal entity. This means that there's a clear separation between the company's assets and those of its owners and investors.

Benefits -

1. Tax benefits

2. Separate legal entity (legal structure that gives protection to the directors)

3. Ability to raising capital through shares

4. Protection of personal assets and from company debt

Drawbacks -

1. Documents are public

2. Additional costs of compliance

3. Administrative responsibilities of the legal structure

Partnership

Each partner shares the responsibility of the business. This includes any losses and debt in the business. Rather than paying corporation tax on profits, partners must file and submit an SA800 return, they will then be subject to income tax on any profits made in the period.

Benefits -

1. Fewer legal obligations than a Ltd company

2. Easy to get started

3. Unique perspectives brought by each partner

Drawbacks -

1. As with sole traders, there is full liability for debts and losses. Assets and property could be at risk

2. Potential for conflicting views

3. Profits must be shared

Limited Liability Partnership (LLP)

Similar to a traditional partnership but it offers the advantage of limited liability to its members; meaning members are not personally liable for any of the businesses debts or obligations.

Benefits -

1. Limited liability - partners personal assets are protected

2. Easy to set up

3. LLP names are protected and recorded on Companies House

Drawbacks -

1. Financial accounts are public

2. Profits are taxed as personal income

3. Must be at least two members

What Is Meant By A Business Structure?

A business structure outlines how a company is set up, including its legal framework, tax obligations, and daily operations. The following are a few of the key aspects that influence a companies structure:

Ownership

Ownership defines who holds control of the business and how that control is distributed. When a company is incorporated, it can issue shares to represent ownership, with no set limit on the number of shares it can issue. In contrast, business structures like LLPs, partnerships, and sole traders cannot issue shares, making ownership a key factor to consider when choosing the right business structure.

Legal Framework

Business legal structures are classifications that outline how companies are officially registered with the government. This structure affects a business’s tax obligations and the extent of personal liability its owners may face if problems arise. Meaning that a director's personal assets are protected and are only liable for any company debt according to their share holdings. It also impacts the types of documents required to stay legally compliant with Companies House and HMRC. For example, partnerships have the legal obligation to file an annual SA800 return, whereas a Ltd company must file a CT600 return, rather than the SA800 return.

Liability

A business structure defines the legal structure of your company. For example, as a sole trader, your personal assets are not legally separate from your business, meaning you're personally liable for any company debts and obligations. In contrast, a limited company is a distinct legal entity, offering greater protection for your personal assets. Choosing the right structure is important as it affects how much personal risk you take on if the business cannot meet its liabilities.

Taxation

As mentioned previously, the structure of the business determines how the business is taxed. Sole traders and partnerships see profits taxed at their personal tax marginal rate, whereas limited companies profits are charged corporation tax. Currently in the UK, corporation tax stands at 25% (For businesses with augmented profits over £250,000). When you incorporate from a sole trader to a Ltd company, this means you will start to pay 19% (for profits under £50K)- 25% corporation tax on the company profits, rather than up to 45% income tax on profits as a sole trader.

Operations

In the UK, a businesses structure impacts how decisions are made, management roles, and reporting responsibilities. Sole traders operate independently with simpler reporting duties, whereas limited companies have structured management with directors, shared decision making, and stricter reporting requirements with HMRC and Companies House.

How to choose the right business structure

Looking For More Information?

Hopefully this article has given you a better understanding of business structures and the key aspects to consider when choosing your new business structure. For more information on topics related to organisations, feel free to explore our knowledge base. Alternatively, if you have any further questions on which business structure best suits your needs, do not hesitate to contact us here.