Choosing A Business Structure

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Starting your own business is an exciting experience. At the same time, choosing the right business structure and complying with all legal requirements is hugely important for your potential growth.

Often startups overlook the importance of their business structures upon their future successes. Overall, the decision to structure a business can affect company growth, the amount of tax paid, the extent of liability owed, the legal requirements needed to satisfy each form and the sheer volume of paperwork. If your business is to survive, it is pivotal you consider, or allow Linkilaw to consider on your behalf, what structure is best suited to help your entrepreneurial company flourish.

Therefore it is recommended that you carefully consider the exact type of business you want to establish during the early stages and prepare all relevant documents and information. The possibilities are numerous, thus a thorough analysis of your goals and aspirations is required and it is worth discussing the financial implications of these with an accountant or solicitor. On the more practical side, there are a number of legal requirements and documents that need to be satisfied depending upon your chosen legal structure.

The 5 types of business structures:

SOLE TRADER

As a sole trader, you run your own business as an individual. You can keep all your business’  profits after you’ve paid tax on them but you are also personally responsible for any losses incurred by the business. This doesn’t mean that you have to work alone or preclude you from employing staff.

To begin operating as a sole trader, you do not need to formally ‘create’ anything, you will just need a bank account and to keep a record of your income and expenditure so that you or your accountant can complete this information for your tax return.

You will pay income tax on sole trader income and you will need to make national insurance contributions. If and when your business income exceeds £83,000 per year, you will also need to register for VAT. This type of business is predominantly made up of a single owner, who is wholly responsible for any loses incurred, and sometimes employees.

There are no fees or dues owed to register with HMRC (other than tax), a minimal amount of red tape and the perks of naming rights. The owner must be registered as self-employed, submit tax returns and pay income tax.

PRIVATE LIMITED COMPANY

Perhaps the most widely used and flexible form of business structure, a private limited company is an entity that has a separate legal personality, which means that shareholder liability is limited to the amount they have invested and the company itself can enter into contracts, own property and intellectual property and borrow money in its own name.

The company will have its own bank account and the company finances will be completely separate separate to your personal finances. At least one director must be appointed when registering. Directors of the company will have personal duties which they must fulfil in managing the company business so the directors have some personal liability to shareholders.

You can also set up a private company limited by guarantee, which means that the company directors will provide a guarantee up to a certain amount for when the company suffers losses or incurs debts. A private limited company is usually the preferred options for startups seeking external investment in exchange for equity, so it is worth considering this structure if this is part of your plan for now or the future.

LIMITED LIABILITY PARTNERSHIP

A Limited Liability Partnership or “LLP” is more similar to a similar to a limited company, in the sense that it has a separate personality and the partners’; liability will be limited to the amount they have contributed to the LLP. However, the structure of the business is as a partnership, not a company, so only named partners will share profits and there will not be any external shareholders. The LLP may have a Board of Directors to manage the LLP.

Sole Trader

Small law firms,
Medical offices,
Real estate offices

No Startup Cost
However, paying a lawyer to draw up a partnership agreement is advisable.

Each partner pays income tax on his/her share of the profits.

Private Limited Company

Linkilaw LTD,
Virgin Atlantic Airways Limited

Startup cost approx. £100 for company registration
But you will also need an accountant to prepare and file annual reports and accounts. There may also be a fee on setting up a business bank account.

The company will only pay 20% corporation tax
However you will need to pay income tax on any income you receive from the company or tax on dividends paid. Companies with over £83,000 ‘VAT taxable turnover’ will need to be VAT registered too.

Limited Liability Partnership

The big four
accountancy firms,
multinational law firms,
other professional service firms

Startup Cost
Ranging from:
£40-£100

Each partner pays income tax on his/her share of the profits
All the partners must send a personal Self Assessment tax return every year, pay Income Tax on their share of the partnership’s profit and pay National Insurance.

PUBLIC COMPANY

Public companies differ from private companies by the fact that their shares are available for sale to the public. It is a good way to raise extra funding, however you need to satisfy more requirements when registering such an entity, as well as after incorporation. This is not a common way to structure a business when starting out, due to the large number of requirements and costs involved with creating a public company.

CHARITABLE STRUCTURES

There are a number of different charity structures available for registration – Charitable Company, Charitable Incorporated Organisation (CIO), Charitable Trust, or an Unincorporated Charitable Association. The choice of structure for your charitable or not-for-profit venture depends on your goals and plans for future development and requires specific legal advice.

As you can see, choosing the right business structure can be a hard task. Do not hesitate to contact us for assistance in making this decision. Practical considerations when choosing a business structure:

– Governance documents: It is essential when starting your business that you think about how it will be governed and formalise this in some way. The way the business is governed will differ according to the type of business structure you choose.

– Name: Choosing a name for your business may seem an easy task, but it actually requires serious consideration. Not only should the name not already be in use, but some words of symbols are not capable of being registered as a company name. It is also advisable to check if your proposed business name already exists as a trademark and if any other businesses in similar industries have the same or similar name, as they may object to you creating your business in that name.

– Address: Every business should have a registered address, which can either be the same or separate to the address where you are actually trading. Please note that even if you are working from home, you may need to use a different address if your tenancy agreement forbids carrying out business activities on the premises.

If you have considered business structures and have decided upon starting a private limited company, check out our post on the practical considerations for company formation here.

We Help Entrepreneurs Set Up Their Business In A Legally Sound Fashion

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