How to structure your business might not be the first thing that springs to mind when starting your new venture. Sorting out the legal stuff doesn’t exactly set the heart racing, especially when a million other things need doing. It’s tempting to stick it on the back burner for another time, especially when finding the head space is hard right now.
But choosing how to set up your business impacts all sorts of things, from how to register it, paying tax, and even attracting investment and funding.
So how do you know which path to follow? Here we take a look.
Why do I need to choose a particular business structure?
The structure of a business dictates (amongst other things) its tax status, who is liable for any debts, how to take money out the business, and how it’s run.
So what are the different types of business structure?
First off, it’s well worth familiarising yourself with the main types of businesses available, their features, and advantages.
Sole Trader
You and your business are essentially one and the same, so you own all assets and profits, as well as being responsible for any debts. You are your own boss with no shareholders to answer to.
| Advantages | Disadvantages |
| It’s an easy and cheap business structure to set up without much admin. You won’t need to register with Companies House, so your information will be more private. | You have full responsibility for the business. If it fails or owes any debt then your own assets might be at risk. In some cases, you might also find more lucrative contracts harder to get due to less credibility. |
Limited Company
A limited company is a separate and distinct legal entity with its own assets and employees. Shareholders only have liability up to their own share value.
| Advantages | Disadvantages |
| Limited companies can benefit from a more favourable tax set-up.
There’s also less financial risk for company owners, because you’re separate to the company. |
There’s more regulation and admin (such as Company Tax Returns for the business, then Self Assessment for the directors) which generally makes limited companies more expensive to run. Privacy is limited as accounts are published via Companies House. |
General partnership
A general partnership is where two or more partners share the profits of the business. Partners might be individuals, a limited company, or even another partnership.
| Advantages | Disadvantages |
| Cheap and easy to set up, partners share the decision-making and workload. They also offer more privacy over a limited company. | A written agreement is really important here. Without one, any disagreements can quickly become a problem, particularly if one partner feels they contributed the lion’s share. Similar to sole traders, partners are also personally liable for any debts. |
Limited liability partnership (LLP)
Very similar to a general partnership but with limited liability.
| Advantages | Disadvantages |
| Partners can share the profits however they like and can leave or join the business easily. Each partner also has limited personal liability, so their assets are safer if the business runs into trouble. | With LLPs the partnership agreement is public so there’s less privacy. |
I’m a start-up looking to grow. What structure is best for me?
Think carefully about the goals of your business. Are you looking to attract new customers, expand, and perhaps sell it later on? If so, a limited company might be easier to sell because it’s legally separate to you as the owner.
What about sole traders?
If you plan to stay small, or your business isn’t likely to be that risky, then operating as a sole trader might be more straightforward. There are around 3.1 million sole trader businesses in the UK – that’s about 56% of all UK businesses!
It’s a really popular way of doing things as it’s not only quick to set up but is pretty stress-free too. Just don’t forget Making Tax Digital for Income Tax Self Assessment – it’s on the horizon!
Many sole traders offer fairly low-risk services such as freelance writing or run artisan businesses. Whilst you do have full personal liability for the business, you may also be able to insure yourself against some of the risks with things like professional indemnity insurance.
What kind of scenario would best suit a partnership?
There are lots of reasons why a partnership might be useful, for instance if you decide to join forces with another business without needing to set up a limited company.
Another business might offer different products or services, but with a similar goal – such as two lifestyle brands working together. Forming a partnership can also help to you share costs and develop new ideas on a less formal basis, but with the benefit of some sort of agreement in place.
We could go back and forth with the pros and cons of each structure all day, but really it very much depends on your business and what you’re trying to achieve. It’s well worth a chat with an accountant if you’re not sure!
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