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Legal structure of your business

There are many ways of owning a business.

This graphic outlines the three most common ways and more detail is provided in the expandable sections below:

Sole Trader

Unlike other business formats, sole traders (and partnerships) can start trading straight away, although certain types of businesses may need a licence to trade. If trading under a name other than that of the owner, one must display the name and the address of the owner at the premises and on the stationery.

  • Setting up: Register as self-employed.
  • Liability: If the business fails, then the owner is fully responsible for all the business’ debts.
  • Management: The owner’s word is final.
  • Finance: More often than not, the owner’s personal money.
  • Profits: All profits belong to the owner.
  • Taxes etc.: Self-employed status. Even if the owner doesn’t draw on his profits they are still taxed. Losses can be offset against tax on other income.
  • Continuity: If owner dies or retires, the business may collapse.

Partnership

Unlike other business formats, partnerships (and sole traders) can start trading straight away, although certain types of businesses may need a licence to trade. If trading under a name other than that of the owners, one must display names of owners and an address, for each, at which documents can be served.

  • Setting up: Partners need to register as self-employed. It is wise to seek the advice of a solicitor and form a ‘deed of partnership’.
  • Liability: If the business fails, then the owners are fully responsible for all the business’ debts.
  • Management: The partner’s share responsibility for controlling the business.
  • Finance: More often than not, the partners’ personal money.
  • Profits: All profits are shared between the partners (as agreed within the ‘deed of partnership’).
  • Taxes etc.: Self-employed status. Even if the partner’s don’t draw on the profits they are still taxed. Losses can be offset against tax on other income.
  • Continuity: The partnership is dissolved if one of the partners dies, resigns, or becomes bankrupt.

Limited Company

Unlike sole traders and partnerships, trading cannot start straight away. Certain types of licence may still be required. The business name must include the word Limited or Ltd at the end. Also see Limited Liability Company

  • Setting up: Register with the Registrar of Companies at Companies House.
  • Liability: The shareholders’ (members’) personal assets are protected if the business fails. You can only lose what you have put into the business (limited liability).
  • Management: The business is controlled by the board of directors. They are each held personally responsible for its management and must act in the company’s best interests.
  • Finance: Capital is raised by the sale of shares, although not to the general public.
  • Profits: Dividends are paid to the shareholders.
  • Taxes etc.: Employee status. The Directors are employed by the company through the PAYE tax system.
  • Continuity: The company is a legal entity in its own right and can be sold, or buy shares in other companies. It has ‘perpetual existence’. An accountant would be happy to give further advice on these matters.

A public limited company (PLC) is basically the same as a private limited company (LTD), in that there is limited liability. However there are some important differences to be aware of. The key difference between public and private companies is that a public company may offer to sell its shares to the public. Before it can start in business or borrow money, a public company must satisfy Companies House that at least £50,000 worth of shares have been issued and that each share has been paid up to at least a quarter of its face value. It will then receive an authorization to commence business and borrow.

A useful tool to help with the decision to set up is www.gov.uk/running-a-limited-company.

Another useful tool to help with the nuts and bolts of setting up a limited company is https://www.gov.uk/limited-company-formation/overview  where you can also see examples of model documents such as the articles and memorandum of association.

You can register your new company online here https://www.gov.uk/register-a-company-online .

Limited Liability Partnership

A limited liability company (LLP) is an alternative corporate business vehicle that gives the benefits of limited liability but allows its members the flexibility of organising their internal structure as a traditional partnership. Any new or existing firm of two or more persons will be able to incorporate as an LLP in England, Scotland or Wales. It is not possible to convert a company to an LLP or vice versa. LLP’s are not available to Charities; there must be a view to profit. LLP’s are similar to companies in the respect that they will be required to provide financial information, including the filing of annual accounts. They must also notify any changes to: membership; members’ names & addresses; the registered office.

  • Setting up: Register with Companies House, the method is similar to registering a company.
  • Liability: The LLP will be a separate legal entity and while the LLP itself will be liable for the full extent of its assets the liability of the members will be limited. Under certain circumstances, however, claims for economic loss could be made against individual members who have been negligent. Any such claim would be a civil action outside the contract as the party would have contracted with the LLP.
  • Management: The business is controlled by the ‘designated members’ (who have a similar responsibility to a directors / secretary of a Ltd Company) and the ‘members’.
  • Finance: Capital is provided by the members, LLP’s are similar to ‘Partnerships’ or ‘Sole Traders’ in this respect.
  • Profits: Incomes derived by the members will be closer to that of a ‘Partnership’ than to the dividends paid by companies.
  • Taxes etc.: An LLP will be taxed as a ‘Partnership’. The members will provide working capital and share any profits.
  • Continuity: The LLP is a legal entity in its own right.

Franchise

The term ‘franchising’ covers a variety of arrangements in which the owner of a product, process, service or even just a name (in the terms of a celebrity) allows someone else to use it in exchange for some payment. It is a method of starting a business which minimises risk by using or emulating a tried and tested ‘business formula’. A contract is forged between ‘the franchisor’ – (the organisation that supplies the franchise) and ‘the franchisee’ – (the party that purchases the franchise).

The franchise package supplies most of the things that one needs to launch the business successfully: training, licence to use franchise name, customer base, supplies and raw materials, equipment, promotional material etc. In addition to a set-up fee, the franchisor may charge an ongoing fee based on the percentage of sales or profits of the business. The key point is that it should be a proven business system that is offered – not merely the right to sell a product or service.

Workers Co-operative

A workers co-operative is a company which is owned by its employees.

Social Enterprise

A social enterprise is an organisation that applies business strategies to achieving philanthropic goals. Social enterprises can be structured as a for-profit or non-profit. Many commercial enterprises would consider themselves to have social objectives, but commitment to these objectives is fundamentally motivated by the perception that such commitment will ultimately make the enterprise more financially valuable. Social enterprises differ in that, inversely, they do not aim to offer any benefit to their investors, except where they believe that doing so will ultimately further their capacity to realise their philanthropic goals.

Charities

A charitable organisation is a type of non-profit organisation (NPO). It differs from other types of NPOs in that it centres on philanthropic goals (e.g. charitable, educational, religious, or other activities serving the public interest or common good). For more information visit the Charity Commission.