Setting up a new business is a very exciting venture, but also a challenging one. You will
likely have lots of questions, and one of those will probably be, ‘what type of business
structure is right for me and my business?’
Before you make this decision, we strongly advise that you do your research on the different
types of business structures. The structure you choose will affect the way your business
grows, makes big decisions, pays taxes, and deals with liabilities.
Although it is possible to change your business structure later on, it is wise to start out with
the right structural set-up for you to avoid complications and a large cost later on.
Read on to learn more about the main business structures in the UK.
What Are The Main Types Of Business Structures?
Sole trader
Partnership
Limited company
Limited liability partnership
Each business structure has its own advantages and disadvantages, depending on a variety
of factors such as the size of your business, the kind of business it is, and your future plans
for it.
Sole Trader
A sole trader is possibly the most popular type of business that entrepreneurs choose. It is
often referred to as simply being ‘self-employed,’ although there are other forms of self-
employment such as freelancers or contractors.
The Advantages And Disadvantages Of Being A Sole Trader
This is the simplest type of business to register. Other benefits of choosing to be a sole
trader are that you are in full control of business decisions, and you can keep all profits from
the business (after tax). Sole traders do not have to work alone, you can hire staff as long as
you notify HMRC and follow employment law.
The main disadvantage of being a sole trader is that because your business and personal
finances are not legally separate, there is not much protection when it comes to business
liability issues. You are responsible for any and all business losses.
It is also your responsibility to record your sales, expenses and complete your yearly Self-
Assessment tax return, however there is the option to hire an accountant to help you out
with this.
To summarise, it is a simple structure that involves lots of personal risks.
Partnership
In a partnership, the company is owned by two or more people who sign an agreement
establishing how the business’s profits, liabilities and ownership are shared between them.
They also share the costs, risks, and general responsibilities of the business.
There is no limit to the number of partners, though larger partnerships are often deemed
riskier to manage. The partnership structure is similar to the sole trader structure, except
there are at least two people involved.
The Advantages And Disadvantages Of A Partnership
The main advantages of a partnership are flexibility, an easier start-up process and access to
a wealth of knowledge, experience, and skills alongside your business partners.
The main disadvantage, and probably one of the main risks, is that if one partner in the
business was sued successfully, all partners would have to share the damages.
In summary, a partnership is a streamlined setup for business partners that fully trust each
other and know each other well.
Limited Company
A limited company is a privately managed business that is owned by its shareholders and
run by its directors.
The company is considered to be a separate legal entity from its owners, and due to that
partners do not share responsibility for the business’s liabilities. Therefore, if a partner in
the business were to declare bankruptcy or pass away, the business would be protected
from dissolving.
Incorporating your business as a limited company requires you to register it with Companies
House.
The Advantages And Disadvantages Of A Limited Company
One of the main advantages of a limited company is that the business’s finances are
separate from yours, reducing financial risk to you personally. If the business is sued or just
fails, you are only liable for the face value of your share in the business.
Another advantage of a limited company is that it can be slightly more tax-efficient
because companies pay corporation tax at 19% of their profits rather than pay income tax
on income.
One disadvantage of a limited company is that it involves much more administration
compared to the other business structures. It is likely that you will need to hire an
accountant and possibly a company secretary too.
You are required to submit an annual company tax return and full accounts to HMRC, and
you are responsible for paying your employee's National Insurance contributions and
income tax too.
In summary, a limited company is a good idea for a mature business that is willing to focus
more on stability than agility.
Limited Liability Partnership
A limited liability partnership is similar to a partnership, however, the partner’s liability is
limited to the amount of money they invest in the business. Limited liability partnerships
must be registered at Companies House and with HMRC, and yearly company accounts must
be filed.
The partners in an LLP are also not responsible for each other’s actions. This business
structure is particularly popular in the financial and legal sectors, such as accountants,
solicitors, and lawyers.
The advantages and disadvantages of a limited liability partnership
A key advantage of an LLP is that if the business were to fail, each partner is only viable for
the face value of their share.
The most notable disadvantage of an LLP is that similarly to a limited company, there is a lot
of administration to be done, meaning that an accountant or company secretary is desirable
(though not mandated by law).
Other Types Of Business Structures
Here are a few of the less common company types that businesses can opt for –
A not-for-profit/charitable organisation - Charities provide services that are considered ‘charitable,’ and therefore solely for the benefit of others and never for personal gain or wealth.
Franchise – A business turns into a franchise when the original owner/s of the business licence the business to other parties. Once franchised, the new owners of the franchise are legally allowed to operate under its trade name and trademarks.
Freelancer – A freelancer is someone that is self-employed and works for themselves. They are responsible for their business assets, and although they don’t hold any employment contracts with other companies, they can be subcontracted.
Thanks For Reading! One Last Thing…
Thank you for reading our article about the different types of business structures in the UK.
If you need some assistance with choosing the right structure for your business, get in touch
with us today. We have lots of experience in business planning and we would love to help
you out.