Choosing a business structure can seem like a complex decision. Though still at the early stages of business, your choice could have an impact on your growth, financing opportunities, and tax responsibilities further down the line. Understanding the various characteristics of each business structure, as well as the respective legal and administrative duties that they entail, is a good place to start. Once you’ve understood your options, you should take a look at your own business and circumstances to see which would be the best fit. This guide walks you through some of the factors you should consider to ensure you choose the right legal structure for your business.
Note: This article discusses business structures and legal requirements relevant to starting a business in England and Wales.
Different business structures in England and Wales
There are four broad business structures that you can choose to incorporate as in England and Wales:
- Sole Trader
- Limited Company
- Limited Liability Partnership
How to choose a business structure
The best type of business structure for you will depend on various factors such as the nature, size, profits, management structure. If you’re unsure, we would recommend consulting a legal expert who can guide you through both the decision and registration process.
Factors to Consider When Choosing a Legal Structure for your Business
One business structure is not objectively better than another. Rather, one might be better for your business’ particular circumstances and needs. It’s worth taking the time to make the right decision, however, as it can be costly and time-intensive to change your business structure down the line. In order to choose the right business structure, ensure to consider the following factors:
Ease of setup
From a practical perspective, some business structures take longer and require more bureaucratic and legal processes to set up. For example, setting up as a Sole Trader is comparatively quick, straight-forward, and low-cost compared to incorporating as a limited company. Whereas a Sole Trader simply has to register with HMRC, a limited company is also required to file with Companies House and present additional paperwork. There are also additional fees and costs associated with registering as an incorporated business.
Administrative load, Legal Requirements & Scrutiny
Certain business structures are party to more scrutiny and entail far more administrative and legal responsibilities than others. For example, Directors of incorporated businesses are governed by the Companies Act 2006 and must use reasonable skill, care and diligence in their business activities. Further, incorporated businesses are required to file annual accounts and submit their financial reports (which are kept in the public domain). Limited companies are legally obliged to keep detailed records of their activities and also have to undergo an annual audit.
Partnerships have additional tax returns to file.
Personal liability and risk
When choosing a business structure, it’s important to consider the different levels of personal liability and risk. Some business structures expose you to less personal risk than others. For example, as a Sole Trader or in a Partnership, your business does not have a legal personality separate to you. This means you are personally liable for any losses or debts that the business is liable for.
Limited Liability Partnerships and Limited Businesses, however, create a standalone legal entity for the business, limiting how much personal liability you take on.
Scalability of your business
Even though you may still be in the early stages of business, it’s good practice to consider how your choice of business structure may impact the scalability of your business in the longer term. For example, in terms of financing and investment opportunities, you may find that if you register as a Sole Trader, you’ll lack certain credibility needed to secure funding.
In addition, it may be easier to secure a loan as a limited company or a limited liability partnership, this is because you are able to offer your stock as security for any loans that you take out, whilst retaining the ability to buy and sell that stock. Whereas for a sole trader or partnership, this is not possible.
Another consideration is your management structure and your control over your business. If you choose to incorporate as a limited company, you’ll have to appoint a board of directors. This means, that from some perspectives, your control over the business is diluted.
Tax, income and profits
Another consideration is the tax implications of your business structure. For example, Sole Traders, Partnerships, and Limited Liability Partnerships pay income tax (as well as National Insurance) on any profits made – subject to relevant thresholds, whereas a Limited Company pays corporation tax.
FAQs about Choosing a Business Structure
1. What is the most popular business structure in the U.K.
Sole Trader is the most common business structure in the U.K. with 59% of private sector businesses operating as a Sole Trader in 2019.
2. What business structure is the best for a small business?
It depends on your particular business and needs. However, for ease of set up, registering as a Sole Trader is quick, easy, and straightforward. If you’re in the very early stages of your business, this might be a good choice for you. Partnerships are also easy to form, depending on how your business is structured.
3. What is an example of a sole trader?
Just some examples of sole traders include freelance designers, copywriters, and marketers, as well as self-employed builders, plumbers, and electricians.
4. Who are the owners of a limited company?
A limited company is owned by its shareholders.
5. What are advantages and disadvantages of partnership?
Advantages of registering as a business partnership include ease of setup and higher chances of raising finances. Whereas a disadvantage is the personal liability of all the partners involved.
You can read more about the advantages and disadvantages of different business structures in our blog post.
Final thoughts on choosing a business structure
Choosing a business structure can feel overwhelming. In amongst all the legal jargon and administrative responsibilities, it can be difficult to understand which is the best choice for you and your business. By looking at the factors you should consider when choosing a business structure, you should be able to better navigate your different options.
If you would like some expert legal guidance and oversight on choosing your business structure, our expert business lawyers are on hand to help. Get in touch to find out how we can work with your business.