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Which Legal Structure Should I Choose?

Which Legal Structure Should I Choose?

Published: 11 June 2018

New idea, new business? Or perhaps you are looking to scale up your existing business and want to ensure that you have the right structure in place?

There are a number of options available and choosing the right corporate vehicle for your needs is very important. The right structure could not only save you money, but also offer protection against your personal assets (such as the family home) if the business encounters difficulties.

So what are your main options?

 

Sole Trader

Trade in your personal capacity as a ‘sole trader’. The business is run by you, for you. Sole traders enjoy the benefit of all profits but also personally bear the burden of any debts and liabilities.

How to set up

There are no formal registration requirements meaning trade can begin both quickly and easily. Don’t forget to register with HMRC for VAT purposes, and pay your income tax on any profits.

           Advantages

           Disadvantages

  • Minimal formalities
  • Personal liability for debts and liabilities
  • Retain all profits
  • Limited tax advantages
  • Privacy (no obligation to make accounts public)
  • Can be difficult to raise finance
  • Full control of the business
  • Can lack the reputational benefits of a formally incorporated company

 

Partnership

For those of you who have a common business idea, you may wish to consider setting up a partnership.

A partnership can be formed at any time between two or more people (sometimes even without intending to) who are carrying on a single business together. The business is jointly owned and any partners to the business are collectively liable for its debts. It is customary for the partnership to be run in accordance with a partnership agreement.

How to set up

You must choose a name for the business, and a nominated partner. Each of the partners must register themselves with HMRC (for self-assessment). Similar to a sole trader, there are no other formal registration requirements.

           Advantages

              Disadvantages

  • Minimal formalities & inexpensive to run
  • Personal liability for debts and liabilities
  • Responsibilities shared between the partners
  • Danger of disagreement
  • Privacy (no obligation to make accounts public)
  • Limited tax advantages

 

  • Profits split equally (can be unreflective of individual contribution to the business)

 

Private Limited Company

A private limited company can be incorporated and solely owned by one (or more) individuals, whose liability will be limited either by shares or by guarantee.

If the company is limited by shares, the shareholders of the company will only be responsible for any debts and liabilities to the extent that they have invested in the company. For example, if the company is incorporated with a share capital of 100 shares of £1.00 each, then the liability of the shareholders is limited to £100. There is also no minimum capital requirement so liability really can be limited!

If the company is limited by guarantee, liability is limited by the members guaranteeing to pay the company’s debts only up to a fixed amount each (usually £1). Companies limited by guarantee are not very common and are usually used for charities, clubs, community enterprises and some co-operatives as any assets or financial surplus cannot be distributed to the members. The company is also not owned by its members and so cannot be transferred for value.

How to set up

You must incorporate a private limited company at Companies House, and the business name must contain the word ‘Limited’ or ‘Ltd’. Once incorporated, there is an ongoing obligation to file accounts and information at Companies House. You must also register the company with HMRC for corporation tax.

           Advantages

            Disadvantages

  • Members have limited liability
  • Limited privacy
  • Tax advantages
  • Legislative & regulatory requirements
  • Easy incorporation process & unlimited lifespan
  • Decision making and administration can be onerous
  • Shares can be traded privately to raise funds

 

 

Limited Liability Partnership (LLP)

Despite the name, a limited liability partnership is treated more like a company as opposed to a partnership. Some or all of the partners will have limited liabilities and each partner will be responsible individually as opposed to collectively.

The constitution of the business will usually be set out in a written agreement (an LLP Agreement) but there is no legal requirement to do so.

How to set up

Like companies, LLPs must be incorporated at Companies House; there must be at least two members. There is also an ongoing obligation to file accounts and information at Companies House.

           Advantages

            Disadvantages

  • Members have limited liability
  • Limited privacy
  • Less legislative & regulatory requirements than a limited company
  • Limited tax advantages

 

Public Limited Company

A public limited company can be listed on a financial market and so shares can be publicly traded by anyone. Liability in a public company is limited to the value of the individual’s investment.

How to set up

The formalities of setting up a public limited company are the same as those of a private limited company, except a public limited company must have at least one shareholder, two directors and a qualified company secretary. The business name must contain the word(s) ‘PLC’ or ‘Public Limited Company’. The company must have issued shares to the public to a value of at least £50,000.

           Advantages

            Disadvantages

  • Members have limited liability
  • High initial capital commitment
  • Shares are freely tradeable (so it is easier to raise capital for the business or seek an exit for an individual shareholder)
  • Increased regulation (particularly if listed)
  • Branding/reputational status
  • Strict legislative & filing obligations

 

  • (Usually) less control over the company

 

You can change your business structure at any time but it’s easier to get it right from the start!

On the move? For a simple takeaway guide to the advantages and disadvantages of different corporate vehicles please click here.

For further advice, or to discuss your options generally, please contact Kyri Papantoniou, Head of Corporate at Fletcher Day, on 020 7870 3878 or at kyri@fletcherday.co.uk.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.