THE MOST COMMON
BUSINESS STRUCTURES IN THE UK
When you’re ready to start trading, you must choose a business structure and register your business. To help you make the right choice for your business, in this guide we provide a brief overview of the most commonly used business structures in the UK: sole trader, private limited company and business partnership.
Setting up as a sole trader is the easiest and quickest way to start a business. You’re not required to register with Companies House or have a director. You only need to register with HMRC and complete an annual Self Assessment tax return. The paperwork is minimal and there’s no registration fee. Information about sole traders is kept private, unlike that of limited companies which is made public after registration.
The biggest disadvantage of this business structure is that there’s no legal separation between you and your business. You’re personally liable for all activities of the business, including debts, and it may be more difficult to raise money for your business.
Anyone can register as a sole trader (including those in full time employment), but there are certain types of work that require obtaining a licence or permit from your local authority.
Our free step-by-step guide How to set up a sole trader business in the UK? provides more information about this business structure.
PRIVATE LIMITED COMPANY
There are two types of private limited companies: private company limited by shares and private company limited by guarantee.
Private Company Limited by Shares
This business structure is used for the majority of commercial enterprises in the UK. It owes its popularity to the limited liability, potential tax savings and flexibility to change its ownership structure. The company is owned and controlled by those who own its shares. They can keep all the shares for themselves or sell them to raise funds.
The biggest advantage of this business structure is that it has its own legal personality and allows business owners and directors to keep their personal assets and finances separate from the business itself. They become personally liable only in case of fraudulent trading. The biggest disadvantage of this business structure is the increased administration and the cost of preparing annual accounts, if you decide to hire an accountant.
Our free step-by-step guide How to set up a private limited company in the UK? provides more information about this business structure.
Private Company Limited by Guarantee
This business structure is primarily used for political parties, sports clubs, non-profit organisations, social enterprises or membership organisations that require legal personality.
A company limited by guarantee instead of shareholders has guarantor members who exercise overall control in the company. They don’t own the company and generally have no rights to profits. Any profits generated are reinvested into the company and used for achieving its objectives, which are often charitable in nature.
A business partnership is a relatively simple way for two or more people to start a business together. Effectively, it’s made of two or more sole traders who share responsibility for their business. In a partnership, each partner contributes something to the business. That could be skills, money, property, or a combination of those.
Partners normally sign a partnership agreement to determine profit share, capital contributions, how to deal with arrival or departure of a partner, succession, death of a partner, etc. They don’t pay corporation tax. Instead, each partner is taxed through annual Self Assessment tax return on their share of profits. In the UK, there are three types of business partnerships: general partnership, limited partnership and limited liability partnership.
General (ordinary) Partnership
This is the easiest way for two or more people to start a business together. They’re not required to register with Companies House and file annual accounts. A general partnership is very similar to a sole trader business, but it has two or more owners who share profits and liabilities.
The main disadvantage of this business structure is that the partners are subject to unlimited liability for their own and each other’s debts. Also, each partner is authorised to make business decisions and sign contracts without an approval from other partners, unless stated differently in their partnership agreement.
Due to its simplicity, a general partnership could be a good option to start a business and later convert to another business structure such as a limited company.
Limited Partnership (LP)
In a limited partnership there are two types of partners: general partners and limited partners. The general partners are responsible for running the business and have unlimited liability. The limited partners, who act as silent investors, are not involved in the day-to-day operations of the business and their liability is limited to their investment.
Limited partnerships are typically formed by individuals or corporations who want to maintain 100% control over an asset or project and give to their investors only a share of income rather than equity. Limited partnerships must register with Companies House but don’t have to submit an annual return or file accounts, meaning their financial information is kept private.
This business structure is often used for films, commercial real estate projects, such as shopping malls and apartment buildings, or for family estate planning.
Limited Liability Partnership (LLP)
This partnership model was introduced in 2001 by the LLP Act 2000. It’s commonly used by professionals such as solicitors, doctors, accountants, architects, etc. LLPs provide the same benefits as traditional partnerships with the added advantage of limited liability for the partners. The liability of LLP members is limited to the amount each member guarantees to pay if the business runs into financial difficulties or is wound up.
The filing requirements are very similar to those of a limited company. Although an LLP doesn’t pay corporation tax, it has to file annual accounts at Companies House and HMRC at the end of each financial year. Just like with other types of partnerships, each LLP member is taxed through Self Assessment tax return on their share of profits.
Our free step-by-step guide How to set up a limited liability partnership in the UK? provides more information about this business structure.