A GUIDE TO BUSINESS STRUCTURES

There are a number of different business structures that can be chosen by an individual setting up a business in the UK.  It is not always easy to decide which structure will best meet your business/individual requirements as there is not one business structure that will suit every business.  Each structure has its own pros and cons.  This guide provides an overview of the main business structures. 

Sole Trader

The simplest way to start a business is as a sole trader.  A sole trader has complete control over the business and all the profits go to the sole trader.  The disadvantage of this structure is that all the liability lies with the sole trader including all debts and legal claims of the business.  If a sole trader fails in his enterprise he can walk away relatively easily as long as he has no creditors, but there is a risk of being made bankrupt as a sole trader if unable to pay the debts of the business as they fall due.

Partnership

A partnership allows two or more people to join forces and set up business together.  Each partner will share the net profits of the partnership, but will also be liable for its liabilities.  A partnership agreement should be entered into to regulate the management of the partnership and deal with issues such as profits and losses, partnership property, admitting new partners, leaving the partnership, etc.  If no agreement is entered into, the partnership will be regulated by the Partnership Act 1890, which does not cover all requirements and some of its provisions are not appropriate for modern business life.

Limited Liability Partnership (“LLP”)

An LLP is a cross between a partnership and a limited company.  It is a corporate body and a legal entity separate from its members but has the organisational flexibility of a partnership. LLP members have limited liability in that, generally, they do not need to meet the LLP’s liabilities.  An LLP has similar filing and disclosure requirements as companies.   A LLP retains more flexibility than a limited company and it is therefore advisable to enter into an LLP Agreement to regulate the management of the partnership. 

Private Limited Company (“Limited Company”)

This is probably the most common form of company structure.  A Limited Company allows individuals to keep their business distinct from their personal affairs.  The company is its own legal entity and only the company itself is liable for its debts. The company is limited by shares and as a shareholder in the company you can only lose the money that you have invested.

Running a company does have administrative burdens.  On formation, all companies must file a statement of capital at Companies House.  Any alterations to the share capital, constitution, directors, etc will also need to be filed, together with accounts and annual confirmation statements. Shareholders will have to file both individual and company tax returns.  The running costs of a company may therefore be higher than those of a partnership or a sole trader, but the initial cost of setting up a company is similar.

All registered companies must have articles of association.  These can be model articles or bespoke articles, drafted specifically for the needs of the company and its shareholders.  It is also recommended to have a shareholders’ agreement.

Please see the blog on Shareholders Agreements and Articles – https://www.mlplaw.co.uk/shareholders-agreements-and-articles-of-association-does-my-company-need-them/

Company Limited by Guarantee

A company limited by guarantee is formed in the same way as a company limited by shares. A statement of guarantee, which must be included in its constitution, is a statement by each member that if the company is wound up, he will contribute up to a specified (and usually nominal) amount towards payment of the debts and liabilities of the company and the costs of winding up the company.

This business vehicle is favoured by ‘not for profit’ organisations such as charities, clubs and societies, property management companies and community interest companies (see below).

Community Interest Companies

These are limited liability companies with a primary purpose of benefitting the community it is formed to serve and not for the benefit of shareholders, directors and employees.  They are designed for social enterprises that want to use their profits and assets for public good and are generally prevented from distributing profits and assets to the members.

Conclusion

There are advantages and disadvantages to every business structure and before setting up a business it is advisable to speak to a solicitor specialising in business law to receive the advice you need as to which structure will be most suitable for you.

For help and advice on Shareholders Agreements and Articles, please speak to our Corporate and Commercial team by emailing commercial@mlplaw.co.uk or calling 0161 926 9969.