If you’re starting a fresh business venture in the UK, one of many critical decisions you’ll need to create is selecting the correct business structure.
Your chosen structure can have significant implications for your legal and financial responsibilities, tax obligations, and the overall growth potential of one’s business. A survey carried out by Go Self Employed showed business structure type was the most confusing topic for folks starting a fresh business.
In this informative article, we shall discuss the four main forms of business structures in the UK: Sole Trader, Partnership, Limited Company, and Limited Liability Partnership (LLP), combined with the pros and cons of every – hopefully making things clearer for folks starting out.
Sole Trader
A sole trader could be the simplest business structure, often favoured by small businesses and self-employed individuals. As a sole trader, you’re the only real owner of the business and personally accountable for its debts and liabilities.
Pros:
- Easy to set up and operate, with minimal paperwork and administrative requirements.
- Complete control over your company, enabling quick decision-making.
- The capability to keep all profits after tax.
Cons:
- Unlimited liability for business debts and obligations, potentially putting your own personal assets at risk.
- Limited use of funding and investment opportunities.
- Potential difficulty in separating personal and business finances.
Partnership
A partnership is a company structure where two or more individuals bond to form a business. Partners share the earnings, losses, and responsibilities of the business.
Pros:
- Shared responsibility may result in far more diverse expertise and improved decision-making.
- Greater use of funding and resources compared to a sole trader.
- The potential for increased motivation and commitment due to shared goals and a feeling of camaraderie.
Cons:
- Unlimited liability for several partners, meaning each partner is accountable for the business’s debts and liabilities.
- Potential conflicts and disagreements between partners can hinder decision-making.
- The necessity for a partnership agreement to define roles, responsibilities, and profit sharing, which may involve legal costs.
Limited Company
A limited company is a separate legal entity from its owners (shareholders) and has its own rights and responsibilities. The company’s finances are separate from the private finances of the owners, and the liability of shareholders is limited to the worthiness of these shares.
Pros:
- Limited liability for shareholders, reducing personal financial risk.
- Improved use of funding and investment opportunities.
- An expert image that may enhance credibility and customer confidence.
Cons:
- Increased administrative requirements and paperwork, such as having to file annual accounts with Companies House.
- More complicated tax and legal obligations, which might require professional advice.
- Potential conflicts of interest between shareholders and directors.
Limited Liability Partnership (LLP)
An LLP combines elements of a partnership and a limited company. It is a separate legal entity, and the partners have limited liability for the business’s debts.
Pros:
- Limited liability for partners, providing protection for personal assets.
- Flexibility in profit distribution and decision-making, similar to a conventional partnership.
- An expert image, similar to a limited company.
Cons:
- More stringent reporting requirements compared to a conventional partnership.
- The necessity for a proper LLP agreement may involve legal costs.
- A potentially higher tax burden, as partners are taxed as self-employed individuals.
Conclusion
Deciding on the best business structure for your UK business is a must because of its success and growth. By understanding the pros and cons of every structure, you can possibly make an informed decision that aligns with your company goals, risk tolerance, and financial requirements.
It is definitely advisable to consult with a legal or financial professional when coming up with such decisions to ensure you’ve considered all of the relevant factors.
