Different types of business have different legal structures and the kind you choose will depend on the sort of business you have and what you want out of it. The tax/national insurance and record-keeping treatment for each differs, as does the management structure and the way your business can raise money. The choice you make will also affect your financial liability if your company starts having problems. If you are thinking of setting up your own business, it’s a good idea to talk to a solicitor or accountant beforehand – they will be able to advise you on what structure would suit you best.
The sole trader business structure with the least formalities, being a sole trader means you are self employed for tax and National Insurance purposes. You will need to let HM Revenue & Customs (HMRC) know that this is your status within three months of setting up or face a fine. You are in complete control of the business, with all management decisions down to you. You can raise money from your own funds or through loans and all the profits you make are yours (less income tax). You are also solely liable for all debts the business might incur as well though and if the business fails, your personal assets are at risk. The business records you need to keep include an annual self assessment tax return to HMRC and records showing your business income and expenses.
The risks, costs and responsibilities of a partnership are similar to those of a sole trader except that two or more people will share the load. Partners raise cash for the business out of their own assets, and/or with loans, but you can have sleeping partners who put money into the business but aren’t involved in running it. Each partner is classed as self employed and takes a share of the profits. If one partner is to take a larger share, or if the decision-making process needs to be streamlined, a partnership agreement should be drawn up – preferably by a solicitor. This will also dictate what happens if there is a falling out amongst the partners or if one of them wants to leave. In England, Wales and Northern Ireland, partners are jointly liable for debts owed by the partnership and so are equally responsible for paying off the entire debt. They are not severally liable, which would mean each partner is responsible for paying off the entire debt. In Scotland partners are both jointly and severally liable. If a partner leaves the partnership, however, the remaining partners may be liable for the whole debt of the partnership.
With an LLP, the individual partners share the costs, responsibilities and profits of the business as they do with a normal partnership but the liability of each is limited to the amount of money they put into the business and to any personal guarantees they have given to raise finance. Each partner must make annual self-assessment returns to HMRC and all LLPs must file accounts with Companies House (www.companieshouse.gov.uk). Every limited liability partnership must have at least two, formally appointed, designated members, who have more responsibilities placed on them by law. If there are fewer than two designated members then every member is deemed to be a designated member. Designated members must:
Companies are legal entities in their own right so a company’s finances are separate from the personal finances of their owners. Shareholders – who could be individuals or other companies – are liable for the company's debts only to the extent that they have given guarantees (e.g., of a bank loan). If the company flounders though, any money that have put in may be lost. The main types of limited company are:
Companies must be registered at Companies House and have at least one director (two for a plc) aged 16 or over which may also be a shareholder. Directors run the company and must tell Companies House of any changes in the structure/ management of the business. Finance can come from shareholders, loans and retained profits (PLCs can also sell shares to raise cash). PLCs must have a qualified company secretary and although one isn’t essential for a private company, if you have one, Companies House must be notified. Accounts must be filed with Companies House and must be audited unless the company is exempt [insert link to filing accounts article here]. Companies must pay corporation tax on any profits, shareholders must pay income tax on any dividends they receive, while directors are counted as employees and must pay income tax and National Insurance contributions on their salaries like any other employee.
LexisNexis LawyerLocator complies with the Solicitors Regulation Authority's Code of Conduct 2011 regarding referrals published by the Solicitors Regulation Authority, and any solicitor to whom we refer you is an independent professional, from whom you will receive impartial and confidential advice. You are free to choose another Solicitor. In the event that you instruct a solicitor, LexisNexis LawyerLocator will be paid a referral fee of up to £40 per solicitor, per accepted enquiry, but this will not be added to your bill.