Forming a Business: An Overview of Business Structures
What business structure you choose will be key in determining how your firm develops. Learn more about your options here
When setting up in business, it is vital to choose the right business structure. Choose well and you will have a legal framework that plays to your business’ strengths; choose badly and you will be saddled with an inappropriate business structure exposing you to countless costs and unnecessary regulation.
In this article, we will examine the various pros and cons of each business structure, as well as providing the vital practical advice you need to actually put the cogs in motion and form a business.
How do I choose a business structure?
What kind of company structure you decide to adopt will, in the main part, shape where your business is going. Which structure you should choose depends on a number of factors, including your tax situation, how much financial risk you are willing to take on yourself and the sector you operate in.
Here is an overview of the different structures you can adopt:
This is how the vast majority of larger businesses operate. A limited company is considered legally separate from its owners or directors, so if the company fails, you won’t be held personally liable for its debts (unless you have made personal guarantees). A company can only cease to exist through striking off or a winding-up order.
If you run a small business by yourself, this is the most common option. You are self-employed and personally responsible for the business, including all its assets and debts.
This is used if you want to go into business with one or more other partners, sharing the proceeds amongst yourselves. Like a sole trader, you and the other partners are responsible for the company’s debts – and if your partner can’t pay, you must pick up the slack. There is also the option of setting up a Limited Liability Partnership (LLP) which limits your personal liability for the company’s debts.
What is a limited company?
Although it entails the largest amount of red tape, setting up a limited company is the best way of limiting your own financial risk when setting up in business. Put simply, if a limited company goes down, you won’t necessarily go down with it but there are some key features to consider.
First of which is limited liability. As a limited company is considered legally separate from its owners, you and the directors normally can’t be sued for repayment for its outstanding debts (unless you have broken the law in some way). If the company fails and goes into liquidation, its assets will be sold and its various creditors paid.
Another key advantage of a limited company is the ability to break it up into shares and sell equity to raise funds for the business (share sales). You can also use share sales as an incentive to reward or retain key employees.
Next up is corporation tax, limited companies pay an additional tax, known as corporation tax, on any profits they make. The final factor to consider is red tape. Unfortunately, there is a lot of paperwork. You must submit annual tax returns and accounts to HMRC and Companies House, and the information you provide to the latter will become publicly available. There are a number of other requirements you must comply with, such as letting Companies House know whenever you add, remove or change a company director.
How do I set up a limited company?
Setting up a company is no longer an onerous, expensive process; you can now set up a company with minimal effort and expense.
One way is to use your solicitor, accountant or company registration agent. There are dedicated agents available to guide you through the process, including filling out all the necessary forms and creating Articles of Association (documents governing how the company should be run). They may also be able to provide you with a registered office and company secretary, amongst other services.
Another is to buy an ‘off-the-shelf’ company. These are ready-made companies that have been pre-registered at Companies House with a placeholder name and Articles of Association. This is the quickest way of getting a company up and running – you can complete the process within a day – although additional fees might apply for changing things like the company name and share structure.
You can also register at Companies House yourself. It is perfectly possible to eschew the above and go it alone by completing the online registration forms and paying a small fee. You will be provided with a model Articles of Association as part of the process; if you wish to draft one yourself it’s best to get outside help.
Remember that it is a legal requirement to appoint at least one director when setting up your company.