There are three main types of business structures to choose from for your business in the UK. They vary in terms of scale, liability and investors. It is also possible to start off with one structure and move to another one, for example a sole proprietorship can expand to a limited liability company. In this guide, you will be informed on the basics of all the business structures and the benefits and disadvantages of them all.
Sole Proprietorship or Sole Trader
A sole proprietorship business, also known as the sole trader, is the simplest and the most popular business structure because it only requires an individual. The business and the business owner are essentially seen as one entity by the law. The advantages of this are that the business owner is able to make all the decisions, allowing them maximum control over their entire business. You are seen as self-employed therefore any profits made are entirely for you. The disadvantages are that you are solely responsible for the losses of the business, which may affect your personal assets. Income and losses are taxed on the individuals personal tax income return. When it comes to choosing a name for your business, you can use your own name or a fictitious name. However, the trade name will be just that, it will not allow you to separate yourself from the business.
The sole trader business structure is very popular because it’s quick and easy to start and set up, with minimal costs compared to the other structures. The business owner only needs to register the trade name to secure the local business license to get started. Additionally, it is such a great structure because it provides a good starting point. Many businesses change their structure in due course as they expand and grow.
A partnership is an extension to the sole proprietorship structure. A partnership is ideal if you find starting your business by yourself daunting, or have an experienced partner in mind. This structure is suitable for two or more partners that will share the responsibility of the business, and the responsibility and liability can vary depending on the shares owned by the partners. Depending on what you are looking for, sharing business decisions and the direction of the business can be a positive or a negative factor.
Partnerships are reasonably easy and inexpensive to set up. With a partnership structure, all business partners owners act on behalf of the business. They also share the profits according to their share of the business, which should all be highlighted in a partnership agreement. It is also worth noting that if one partner has incurred debt, all partners are responsible. This is known as a ‘joint or several’ liability.
A limited company is very different to the partnership and sole proprietorship business structures because a limited company business is a separate entity to the business owner. The business owner and the business itself are separate from each other in terms of law and the business is its own ‘legal person’. The main benefit of a limited company is that it offers limited liability. You are not personally responsible for the losses and debt of the business as the business is a separate entity is therefore responsible for its own finances. The limited company structure is the most popular among small to medium sized small businesses, and you will find that some clients are only prepared to deal with limited company structures as opposed to the other business types.
A limited company will be owned and controlled by those who own the shares of the company. For example, if you want to run the business alone without the risks associated with being a sole trader, then you can keep all of the shares. Setting up and running a limited company where you become a director and shareholder is one of the most tax efficient ways of working and has a number of advantages. Although it does involve some administration and paperwork, which you should be prepared for, a limited company accountant will be able to help you with this. You can find out more on forming a limited company here.
More information in our ‘Starting up’ section.