Business Structure

If you are considering setting up a business, it's worth thinking carefully about which structure best suits the way and sector in which you intend to do business, as this will affect:

  • which authorities you have to notify that your business exists
  • the tax and National Insurance that you pay
  • the records and accounts that you have to keep
  • your financial liability if the business runs into trouble
  • the ways your business can raise money
  • the way management decisions are made about the business

There are several structures to choose from, depending on your situation and these are summarised below:

Sole Trader

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 straightforward, and you get to keep all the profits. However, you are personally liable for any debts that your business runs up, which make this a risky option for businesses that need a lot of investment.

Partnerships

The main types of partnership are:

  • 'ordinary' partnerships
  • limited liability partnerships (LLPs)

Partnerships have the following features in common:

  • two or more persons – i.e. the partners - share the risks, costs and responsibilities of being in business
  • a partner can be an individual or another business, e.g. a limited company or another partnership 
  • the profits and gains of the partnership are shared among the partners, unless the partnership agreement states otherwise 
  • each partner is personally responsible for paying tax on their share of the profits and gains, and for their National Insurance contributions
  • each partner must register for Self Assessment with HM Revenue & Customs (HMRC) and complete an annual tax return
  • a nominated partner must also send HMRC a partnership return
  • partners raise money for the business out of their own assets and/or with loans
  • the partners themselves usually manage the business, although they can delegate certain responsibilities to employees
  • it's possible to have 'sleeping' partners who contribute money to the business but are not involved in running it from day to day
  • the partnership must keep records showing business income and expenses

Ordinary Partnerships

An ordinary partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved - although the business can still continue.

A partnership is a relatively simple and flexible way for two or more people to own and run a business together.

Ordinary partnerships also have to be registered with HMRC for tax purposes. The nominated partner does this by registering the partnership for Self Assessment.

If the partnership has debts, the partners are jointly liable for any amounts owed and so are equally responsible for paying off the whole debt.

Creditors can claim a partner's personal assets to pay off any debts - even those debts caused by other partners.

If a partner leaves the partnership, the remaining partners may be liable for the entire debt of the partnership.

Therefore, partners do not enjoy any protection if the business fails.

Limited Liability Partnerships (LLPs)

LLPs must have at least two designated members - the law places extra responsibilities on them.

If for any reason the number of designated members falls to one, every member is deemed to be a designated member.

LLPs must:

• register with Companies House
• send Companies House an annual return
• file accounts with Companies House

A partner's liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance.

This means that members have some protection if the business runs into trouble.

Private Company

There are broadly two types of private company:

  • private limited company 
  • private unlimited company

A private limited company may be limited by shares or by guarantee.

  • a company is limited by shares if members' liability is limited to the amount, if any, unpaid on the shares held by them
  • a company is limited by guarantee if members' liability is limited to an amount the members agree to contribute to the company in the event of its being wound up

In relation to set up and administration, a private company:

  • Must be registered (incorporated) at Companies House.
  • Does not have to appoint a company secretary but if one is appointed, this must be notified to Companies House.
  • Must file it accounts annually with Companies House. The accounts must be audited unless the company is exempt.
  • Must send an annual return to Companies House.

Both types of private company must also have at least one member and at least one director.

The director or - where there are two or more directors - at least one director must be an individual. Each director who is an individual must be at least 16 years of age.

The director - or the board of directors - makes the management decisions, directors may also be shareholders.

Directors must notify Companies House of changes in the structure and management of the business.

Finance comes from shareholders, loans and retained profits. Any profits are usually distributed to shareholders in the form of dividends, apart from profits retained in the business as working capital.

For a company limited by shares, shareholders are not responsible for the company's debts unless they have given guarantees - e.g. a bank loan.

However, they may lose the money they have invested in the company if it fails.

Shareholders may be individuals or other companies. However, shares cannot be offered to the general public.

Private Unlimited Companies

A company is an unlimited company if there is no limit on the liability of its members.

It may or may not have share capital.

Company directors are an office holder of the company and therefore regarded as an employee for the purposes of paying National Insurance contributions (NICs). As such, company directors must pay both Income Tax and Class 1 NICs on their director's earnings.

However, while regular employees' Class 1 NICs are calculated on their monthly or weekly earnings separately, directors' NICs are calculated on an annual cumulative basis.

Public Limited Company

PLCs must:

  • Have at least two shareholders.
  • Have 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
  • Have at least two directors - at least one must be an individual. Each director who is an individual must be at least 16 years of age.
  • Have a qualified company secretary

Businesses that are PLCs are the only type of business that can raise money by selling shares to the general public. Shareholders can be individuals or other companies.

The shares may or may not be traded on a stock exchange.

Finance can also be raised through loans and retained profits.

A board of directors usually makes the management decisions.

PLCs must:

  • send an annual return to Companies House 
  • file accounts with Companies House once a year - the accounts must be audited unless the company is exempt

Profits are usually distributed to shareholders in the form of dividends, apart from profits retained in the business as working capital.

The liability of each member is limited to the amount unpaid on their shares.

Members are not responsible for the company's debts unless they have given guarantees - e.g. when taking out a bank loan.

UK Establishments of Overseas Companies

If you are an overseas company, you must - within one month of opening a UK establishment - register with Companies House.

If this is going to be your first UK establishment, you must also send Companies House:

  • a certified copy of your company's constitutional documents, e.g. charter, statute, memorandum and articles of association, with a certified translation in English if the original is in a language other than English
  • a copy of your company's latest set of accounts, again with a certified translation in English if the original is in a language other than English

You only have to submit the accounts if either:

  • the accounts must be filed under the law of country in which your company is incorporated - the 'parent law' 
  • your company is incorporated in an European Economic Area state and the parent law requires you to prepare and disclose accounts but does not require such accounts to be audited or delivered

If this is going to be an additional UK establishment, you don't have to deliver the constitutional documents. You may instead state in the registration document that you have delivered them in respect of another UK establishment - but you must give the registered number of that establishment.

You must notify Companies House of any changes to the original registration information. You must deliver the forms notifying the changes to Companies House within 21 days of the change.

If there is a change in the parent state that affects your company, you must deliver the notifying form to Companies House within 21 days of the date on which notice of the change could have been received by post in the UK.

Contact Us now to see how we can help you decide the best structure for your business.


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