1) about to start a business
2) in business already but feel like you should be using a different structure
3) just interested in understanding the options
…knowing the ins and outs of the most widely used operating structures can help you make the right choice for your circumstances.
In the UK, there are 3 main types of private sector business structure. We've outlined each of them and their formalities below in a “benefit and drawback” format.
Limited company (37% of private sector businesses)
- Provided you act legally and responsibly as director, you can't be held personally liable for any losses incurred by the company – hence the name, ‘limited' liability. As you can imagine, this operating structure encourages innovation and economic growth that otherwise wouldn't exist!
- The structure of a limited company dictates that, with the right advice and guidance, company directors can take advantage of a favourable tax position versus other business structures.
- In the eye of the customer, a limited company holds a perceived authority and legitimacy greater than that of other business structures. This reduces perceived risk, whilst increasing trust and willingness to engage.
- Personal and company information must be filed publicly and kept up to date with Companies House. In truth, this is barely a drawback, but worth noting.
- To reap the benefits (outlined above), there is considerable administrative work to be completed on an ongoing basis. Some of it complex, some not so. Thankfully, all of this can be outsourced to an accountant, meaning you can focus on running your business whilst it's all professionally taken care of in the background.
Sole Trader/Proprietor (56% of private sector businesses)
- Considered the ‘simplest' of our 3 structures, as a sole trader your earnings are your earnings, and all profits are retained as personal income. Nice and simple.
- Starting out as a sole trader grants the business owner ultimate flexibility. Whether you're launching a side-hustle alongside your primary employment, or you are full time but would be open to exploring other operating structures at a later date, you can do so with minimal restriction.
- You are the boss! There is no requirement to converse with other stakeholders before making decisions and you can develop the business exactly how you'd like to, whenever you want.
- Perhaps the defining feature of sole proprietorship – your business is not recognised as a separate legal entity and therefore you are personally liable for all debts and money owed. Should your business fail, your personal assets are at risk, even if they're not connected to the business. This is the caveat of sole proprietorship and unlimited liability.
- You are liable to pay tax on your profits (obviously!) and national insurance contributions to boot. Paying your tax this way becomes less efficient as you climb into in the higher income brackets.
- Conversely to other business structures – in the eye of most customers, a sole trader holds a lesser perceived authority and legitimacy. This increases perceived risk, simultaneously decreasing trust and willingness to engage.
Partnership & LLP (7% of private sector businesses)
- All risk, benefits and of profit incurred in running the organisation are shared between the partners, reducing individual pressure and allowing for shared responsibility.
- In the case of an LLP, the business can be incorporated with 2 or more partners. A partner can be an individual or company.
- In the case of an LLP, the partners benefit from limited liability. Like a limited company, the individuals risk only that which they personally invest in the business, provided that they have acted responsibly and legally throughout.
- All liabilities, debts, negligence and misconduct incurred in running the organisation are shared between the partners.
- In the case of an LLP, members' shared responsibilities and profit allocation are laid out in the LLP agreement. All members are required to submit a personal self-assessment, pay tax on their share of partnership profits, and pay national insurance contributions.
Aside from the above, there are many factors to consider before deciding which route to take, including implications on access to finance, employment law, expansion planning and international trade etc. For an in-depth discussion and practical advice tailored to your exact circumstances, get in touch here.