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Business structures in the UK

Posted by Heidi Mortlock on 23-May-2019 06:30:00

The image is of someone's hand drawing a business organisation chart with a black marker pen.

When setting up a new business, there are many aspects to consider, one of those is the company structure. Should you be a sole trader or a limited company? In this article, we look at the options available to you in the UK and what the liabilities and requirements are for each one.

 

Sole trader

This is a common structure utilised by new business, especially when the business owner will be the only person working in the company. If you’re a sole trader, you run your own business as an individual and are self-employed.

You can keep all your business’s profits after you’ve paid tax on them. You’re personally responsible for any losses your business makes. You must also follow specific rules on running and naming your business.

While registration with Companies House is not required, sole traders must register with HMRC and submit a self-assessment tax return each year.

As the business is not seen as a separate entity under this structure, then you are personally liable for any debts or legal action taken.

You are required to set up as a sole trader if any of the following apply:

  • you earned more than £1,000 from self-employment between 6 April 2018 and 5 April 2019
  • you need to prove you’re self-employed, for example, to claim Tax-Free Childcare
  • you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits

 

Limited Company (LTD)

A limited company is a company ‘limited by shares’ or ‘limited by guarantee’.

 

Limited by shares companies are usually businesses that make a profit. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has shares and shareholders
  • can keep any profits it makes after paying tax

 

Limited by guarantee companies are usually ‘not for profit’. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has guarantors and a ‘guaranteed amount’
  • invests profits it makes back into the company

The limited liability and potential tax advantages mean that this is one of the most popular business structures in the UK. The business is required to register with Companies House and also make specific information publicly available.

 

Business Partnership

You may wish to go into business with other people and set up a business partnership.

In a partnership, you and your partner (or partners) personally share responsibility for your business. This includes:

  • any losses your business makes
  • bills for things you buy for your business, like stock or equipment

Partners share the business’s profits, and each partner pays tax on their share.

 

When you set up a business partnership you need to:

The ‘nominated partner’ is responsible for managing the partnership’s tax returns and keeping business records. The other partners need to register separately.

 

Limited Partnership (LP)

You can set up a limited partnership to run your business. You must have at least one ‘general partner’ and one ‘limited partner’. General and limited partners have different responsibilities and levels of liability for any debts the business can’t pay. All partners pay tax on their share of the profits.

 

What type of partner you are makes a difference to:

  • your liability for the partnership’s debts
  • your responsibilities

You can’t be a general and a limited partner at the same time. All partners are equally responsible for any debts or obligations until the partnership has been registered.

 

Limited partners

As a limited partner you:

  • contribute an amount of money or property to the business when it’s set up
  • are only liable for debts up to the amount you’ve contributed
  • can’t manage the business
  • can’t remove your original contribution

You must register for Self Assessment with HM Revenue and Customs (HMRC).

 

General partners

As a general partner you:

  • are liable for any debts the business can’t pay
  • control and manage the business
  • can make irreversible (‘binding’) decisions for the business
  • can apply for your business to act as an authorised contractual scheme (ACS)

 

As a Limited Partnership you are required to:

You can get more information about setting up a Limited Partnership on the HMRC website.

 

Limited Liability Partnership (LLP)

You can set up (‘incorporate’) a limited liability partnership (LLP) to run a business with 2 or more members. A member can be a person or a company, known as a ‘corporate member’.

Each member pays tax on their share of the profits, as in an ‘ordinary’ business partnership, but isn’t personally liable for any debts the business can’t pay.

You must have at least 2 ‘designated members’ at all times - they have more responsibilities (for example, keeping company accounts). You can have any number of ordinary members. All members must carry out their duties and meet their legal responsibilities set out in the LLP agreement. In addition, every member must register for Self Assessment with HM Revenue and Customs (HMRC).

 

Responsibilities of designated members

Designated members have more responsibilities than ordinary members and must:

Designated members must also:

  • tell Companies House about any changes (for example, to the registered name or address, or members)
  • act for the LLP if it’s wound up and dissolved

Designated members can be prosecuted if they don’t meet their legal obligations. The LLP can also be taken off the register. Find out more about setting up as an LLP on the HMRC website.

 

Guidance

If you are not sure how to set up your new business venture and what structure would be most appropriate, then you may wish to consider consulting a finance professional. We offer a complimentary 1-hour consultation with one of our experienced Life Centred Planners, why not contact us today and see how we can help get your business off the ground.

 

Further information

If you found this information useful you may also want to check out the following:

 

Mike Robertson Associates Limited is an appointed representative of Lighthouse Advisory Services Limited which is authorised and regulated by the Financial Conduct Authority. See Full Details.

They help individuals, businesses and families achieve the best quality of life they can with the resources they have. MRA specialises in corporate solutions, cash-flow analysis, taxation, savings and investments, life centred planning and much more. Life Centred Financial Planners are passionate about working with you to help you achieve your life and financial goals, get control of your finances to enjoy a brighter financial future.

 

Click to contact us

 

Based in East Sussex we service clients across the South East, Sussex and Kent, including smaller towns such as Ashford, Battle, Bexhill, Bodiam, Brighton & Hove, Cranbrook, Crowborough, Eastbourne, Hailsham, Hastings, Heathfield, Herstmonceux, Lewes, Mayfield, Newhaven, Rye, Seaford, Sevenoaks, Tenterden, Tonbridge and Tunbridge Wells.

  

Sources:

https://www.gov.uk/set-up-sole-trader?step-by-step-nav=37e4c035-b25c-4289-b85c-c6d36d11a763

https://www.gov.uk/limited-company-formation?step-by-step-nav=37e4c035-b25c-4289-b85c-c6d36d11a763

https://www.gov.uk/government/organisations/companies-house

https://www.gov.uk/set-up-business-partnership?step-by-step-nav=37e4c035-b25c-4289-b85c-c6d36d11a763

https://www.gov.uk/set-up-business-partnership/register-partnership-with-hmrc

Image credit: Image by Gerd Altmann from Pixabay 

 

Tags: corporate solutions, business structures

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