A GUIDE ON CHOOSING THE RIGHT LEGAL STRUCTURE FOR YOUR BUSINESS
Starting your own business venture and setting up a company are a big step in your entrepreneurial journey. Choosing the right legal structure for your business is a necessary part of getting the business up and running. Therefore, it is essential to understand the options available to you.
At Berard & Lovell solicitors, we want to help you choose the structure that fits your business goals. It is, therefore, important that you evaluate your business aims. Doing this will allow us to help you pick the most appropriate structure for your business. To help you understand your options, we have put together the most common types of business entities and their distinguishing features.
The most common types of structures are:
Private company limited by shares
Under a sole proprietorship business venture, one person is liable for all profits and debts. You act as a sole trader and have exclusive control over the business, including complete access to business profits once all tax liabilities have been paid. To establish yourself as a sole trader, you are required to inform HMRC that you pay tax via Self Assessment, and you will need to file a tax return every year. You will pay income tax on your profits as well as Class 2 and Class 4 National Insurance. As a sole trader, you will be responsible for any losses incurred by your business. Furthermore, there is no separation between personal and business assets. You and the company will operate as one entity. Nevertheless, this is the most common and favourable structure for small businesses.
A partnership holds a similar structure to that of a sole trader, however, it has more than one individual operating the business.
A partnership may be a general partnership where all members of the partnership share profits, losses, debts and administration of the business. All partners make decisions together and are liable for all decisions. Hence, you will be jointly liable for your business partners’ actions. Like the sole trader, the general partnership has no legal personality.
In addition, there is a limited liability partnership (LLP). The LLP has a legal personality and its members have limited liability. Limited liability protects each partner’s personal assets if the business does not succeed.
Hence, each partners’ liability will be limited to the amount they invested and any personal guarantees they may have offered when raising loans for the business. From a tax perspective, the LLP is transparent and the partners themselves will pay income tax on the business’s profits by registering themselves with HMRC as self-employed.
It is advisable that a partnership be governed by a properly drawn up written partnership agreement which will outline how the liabilities, profits and ownership of business assets are split among the partners. The agreement should also mention how partners can enter or leave the partnership.
PRIVATE COMPANY LIMITED BY SHARES
Similar to an LLP, the owners of a private company limited by shares (Ltd) enjoy limited liability equivalent to the amount of capital they have invested in the company.
There is no personal liability for business debts superior to the amount of the investment and hence, members have the benefit of protecting their personal finance from exposure.
To establish a Ltd, you must appoint at least one director who is a natural person and (a) shareholder(s). In addition, you may prepare bespoke articles of association, if you do not opt for the standard articles of association offered by Companies House, and perhaps a shareholders’ agreement. As a limited company, you must pay corporation tax on profits.
SOME FACTORS TO CONSIDER
Flexibility & growth: think about the direction you want your business headed in and the growth you want. The structure you choose should allow for the growth and change of your vision. For example, as a sole trader you will generally have more freedom over the direction of your business. You are only answerable to yourself. However, this comes with the risk of debt which puts your personal finance/assets at risk as well.
Control: if you want significant control over the business venture, a sole proprietorship or Ltd would work best. Note, however, that control can be negotiated in a partnership agreement as well. As part of the board of directors of an Ltd, you will have significant control over the business. As a sole trader, you are your own boss.
Liability: in a Ltd, the shareholders’ liability will not exceed the amount invested. In other words, shareholders’ private assets are not at risk if the company fails. Likewise, members of a LLP will share liability limited to the extent of their investment. If, however, the partnership is not an LLP but a general partnership, the involved partners will be open to personal liability as well.
Tax implications: ideally you want to minimise taxation. You should choose a structure that is optimal based on your financial and administrative requirements.
Costs & complexities: in terms of cost and complexity, a sole proprietorship is the simplest business structure. There are no fees to register and therefore, you can start with business straight away. Partnerships and Ltds require several agreements to be drafted and may also incur registration fees.
Please do not hesitate to contact us if you have any queries on choosing the right legal structure for your business.
+44 (0)203 556 4855