Which Structure Is Right For Your Start-Up?
Starting a business in the UK is relatively straightforward from an administrative point of view. The tricky bit is deciding the type of structure that will allow you to achieve your commercial ambitions. The main options available are:
- sole trader
- traditional partnership
- limited liability partnership
- limited company
Each structure has its own advantages and disadvantages.
A sole trader is a business that is owned and operated by one person (although they may have employees). Many trades such as electricians or plumbers operate as sole traders.
Setting up as a sole trader is easy. You simply need to register with the HMRC for self-assessment and file an annual tax return, and you may need to pay National Insurance.
The advantages of setting up as a sole trader are:
- you are generally hands-on in your business, and therefore the entity is easy to control
- the capital investment to set up is generally low
- the wages bill will be relatively small as you are likely to have only a handful of employees
Disadvantages of being a sole trader:
- you are personally liable for the debts and liabilities of your business
- you may have to work long hours and could find it hard to take holidays or a day off sick
- you will be responsible for running all aspects of the business, from marketing and accounts, to doing the work
- it can be difficult to grow the business as you are limited to the amount of capital you can personally raise in most instances
Partnerships exist where two or more people run a business. They each share liability and profits. If you are entering into a partnership, it is essential that you have a Partnership Agreement drawn up. Failure to do so means the partnership will be subject to the Partnership Act 1890. Passed in the Victorian age, the Partnership Act 1890 can require a partnership to be dissolved if a partner dies or retires. There is also no requirement for a partner to contribute anything toward running the business (or even turning up to work), and regardless of how much work each partner does, all profits must be split evenly.
A Partnership Agreement can set out the duties of each partner, how much capital they put into the business, each partner’s share of the profits and losses, and a dispute resolution procedure.
The advantages of a traditional partnership are:
- partners can share the responsibility of the business, i.e. one person can take over the administration if that is their strong point, the other can manage client needs
- with more people putting in capital, there is more scope to grow the business
- the tax structure is straightforward, with each partner paying tax on their share of the profits
Disadvantages of a partnership include:
- each partner is liable for the debts and liabilities of the business
- disputes can arise if one partner is not considered to be ‘pulling their weight’
- if a Partnership Agreement is not in place, disputes or the retirement of a partner can lead to the dissolution of the partnership and a great deal of expense to re-form it
Limited Liability Partnerships
Limited liability partnerships (LLP) were introduced in 2001 by the Limited Liability Partnership Act 2000. An LLP shares the same features of a traditional partnership structure in terms of tax liability, internal management, and the distribution of profits, but it limits the liability of each partner.
An LLP structure is regularly used by professionals such as lawyers, accountants, and dentists.
Advantages of an LLP
- the LLP is deemed to be a separate entity that can enter into contracts, buy property and borrow money, which limits the liability of each partner
- an LLP still retains the flexibility of a traditional partnership because the operation of the business and sharing of the profits can still be determined by the Partnership Agreement
- the name of the LLP can be protected as it is registered with the Companies House
Disadvantages of an LLP
- financial accounts must be submitted to the Companies House on an annual basis, and these can be viewed by the public
- all income is personal and taxed accordingly, which can mean you will pay higher tax than if you were a registered company
- an LLP must have at least two members; therefore, if one leaves, the partnership may need to be dissolved
Limited Liability Company
By choosing a limited liability structure, you will be able to keep your personal finances and assets separate from the company. This limits your personal liability. Setting up a company in the UK is easy, you simply need to register with the Companies House. You will need to supply a company name, address, the names of at least one director and details of the company’s shares. In addition, you will need to file a memorandum and articles of association, and the details of anyone with significant control over your organisation.
Advantages of a company
- your personal liability is limited
- this type of structure is more attractive to investors and lenders
- the company is only taxed on its profits; therefore, directors are not liable for the higher-rate band of tax which sole traders and partners are often subject to
Disadvantages of a company
- information about the company is public, including the company accounts
- the administrative burden of running a company is higher than that of a sole trader or small partnership
- if you have a number of shareholders, they may have voting rights which may limit what you can do with the company
How Bennett Griffin Solicitors can help with company formation and setup
The choices you make at the beginning on how to structure your business can be significant to its long-term growth. Our lawyers can provide you with clear, concise advice as to which structure would be most advantageous to your business and assist you with the legalities of setting it up. This includes drafting Partnership and Shareholder Agreements and articles of association.
Bennett Griffin are award-winning solicitors based in West Sussex with offices in central Worthing and Ferring. Our experienced and specialist solicitors offer a comprehensive service and will work with you in an honest, considered, and practical manner. Our specialist solicitors can provide expert advice on company structures. Please contact us on 01903 229 999 or by email at firstname.lastname@example.org for more information.