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What are the possible legal structures for your business in the UK?

Companies Act 2006 cover page

As soon as you are set to begin a new venture, you must consider how each decision will affect the growth of your business. The first decision that you must consider is the structures for your business. This structure must also align with the legal structure for your business. Focus on the pros and cons of each to decide what legal structure best suits your business.

It is only appropriate to start as a public limited company (PLC) if you plan to raise substantial funds on the country stock exchange, and in a pre-determined period. Otherwise, you have various options to choose from. Be a sole trader, form a partnership, incorporate a limited liability partnership (LLP) or limited liability company (LLC), and register a private company, so on. However, there are other models of business too such as the community interest companies, cooperatives, offshores and franchises. It depends on your business, and funds to choose a legal structure and steadily scale up with each milestone reached.

 

Become a sole trader

  • You do not pay registration fees
  • You keep accounts and records for all income and expenses
  • You earn all the profits
  • You are liable for all debts
  • All decisions are yours to make
  • You invest, you raise funds, you take loans against your assets

Form a partnership

Ordinary partnerships:

  • Partners are the legal entity
  • Easiest option to run a business together
  • It must be registered with the HRMC for tax
  • The liability is on all partners
  • Creditors can claim assets of any partner to pay off the debts
  • There is no protection in case of a business failure
  • If partner quits or goes bankrupt, or passes away, the partnership must be dissolved. The business can still continue

Limited partnerships:

  • It is a mix of ordinary and limited partnership
  • It must register with Companies House
  • Once registered, HRMC sets up a tax record
  • The liability is limited to the amount of money invested
  • Liability is also limited to personal guarantees

Limited Liability Partnerships:

  • An LLP must have a minimum of two “designated members”
  • These members bear additional legal responsibilities
  • If one designated member resigns, all other members are deemed designated
  • LLPs must register with Companies House
  • They must file an annual return with Companies House
  • They must file all accounts with Companies House
  • HRMC, once informed by Companies House, sets their tax records
  • The liability is limited to the money invested and finance raised

 

Launch a private company

A private company can be a limited or an unlimited company. A private limited company structure is limited by guarantee or by shares.

  • It must be incorporated at Companies House
  • It is not mandatory to appoint a company secretary but, if appointed, Companies House must be informed
  • It must file accounts every financial year with Companies House
  • Must file an annual return as well
  • Both types of private company must have at least one director and one member
  • Directors can be shareholders
  • Finance comes from the shareholders, retained profit and loans
  • It is liable for corporation tax and the company must inform HRMC

Private limited companies:

  • The finances of the business and members are separate
  • Unless shareholders have given guarantees they are not liable for debts
  • Shareholders lose money if the company fails
  • Individuals or other companies can be shareholders, general public do not have access to shares
  • It is limited by guarantee if the member liability is limited to an agreed-upon amount the members pay in case the company is wound up
  • It is limited by shares if the liability of members is limited to the amount unpaid on the shares they hold

Private unlimited companies:

  • There is no limit on the member liability
  • Share capital is not a must
  • One must take legal advice before forming such companies

 

Setup a specific limited company

Instead of the more standard type of companies, one can also set up a community interest company (CIC), right-to-manage company (RTM), and Societas Europaea (SE) or European Company.

Community Interest Company:

  • This is for businesses being run for the community
  • Both members and the community are benefitted
  • It can be both public and private
  • It can be limited by shared capital or limited by guarantee
  • It cannot be a charity
  • It cannot be a political party, or organisation or a subsidiary of either
  • It must be registered ay Companies House
  • The CIC regulator decides eligibility
  • Leisure centers, housing associations, community development trust, worker-owned cooperatives are all CIC initiatives

Right-To-Manage company:

  • It is owned by leaseholders
  • It must be a private company that is limited by guarantee

Societas Europaea:

  • It must be a trans-European company
  • It should be registered on a European Economic Area State.
  • It must also be registered with the Companies House
  • It can be formed by merger, as a subsidiary, PPLC transforming into SE, or as a holding company
  • It must have a share capital and shareholders
  • Shareholder liability must be limited
  • It must file annual return and company accounts to Companies House

 

In conclusion

It is only sensible to read and learn more about the various business structures to find out what legally best suits your business. Careful planning can affect the way you do business or perform in the market. Choosing a legal structure will affect:

  • The National Insurance and tax you pay
  • The accounts and records that you will have to maintain
  • The various authorities that will need information about your business
  • The financial liability in case the business faces financial crunch, runs into debts, etc.
  • The decisions of the management regarding the various business tactics and business functioning as a whole
  • The ways in which you intend to raise funds for the business

 

References

https://www.gov.uk/set-up-business

http://startups.co.uk/choosing-the-right-business-structure/

https://www.unlockthelaw.co.uk/business-structures-uk.html