There are many business structures that you may operate through. There are merits for each option and the ultimate decision will be on personal preference most often based on tax and finance considerations.

The most common structures are set out below:

• Sole Trader
• Partnership
• Limited Liability Partnership
• Company Limited by Guarantee
• Company Limited by Shares

_{This article has been provided courtesy of HBJ Gateley Wareing LLP.}

Sole Trader 

A sole trader essentially refers to an individual doing business in his or her own name and in which there is only one owner. This is the simplest way of starting a business as there are very few formalities. HMRC will need to be informed that you are self-employed for NIC and tax purposes.

Advantages 

• Any profits made by the business will belong to you.
  
  
• No requirement to publish accounts.
  
  
• Business not subject to public scrutiny as there are no public records.

Disadvantages

• Sole traders have unlimited liability and are responsible for all the debts of the business. In the event that a business becomes insolvent the sole trader may lose their personal possessions to repay the debts of the business.
  
  
• HMRC may demand to see accounts to substantiate any figures that are put into your tax return therefore proper accounting records must be kept.
  
  
• May be difficult to raise money in comparison to other business structures.

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Partnership 

If you are going to start your business with one or more other people you could form a partnership. In effect, this is the same as a sole trader with all the partners sharing responsibility for managing the business.

It is customary to have a partnership agreement setting out the duties and obligations of each partner. It may also cover the internal management of the business should the rewards and management not be shared equally. This is a fall back position should conflicts arise between the partners.

Advantages

• Can be set up with few formalities.
  
  
• Expertise can be shared.
  
  
• Money can be raised by introducing “sleeping” partners.

Disadvantages

• As with a sole trader, there is personal liability for the partnership debts.
  
  
• Partnership can be dissolved following dispute or resignation.
  
  
• Problems can occur when partners are incompatible or too numerous.

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Limited Liability Partnership

A Limited Liability Partnership (LLP) shares many of the features of a normal partnership but it also offers reduced personal responsibility for business debts. As a result an LLP may be considered a hybrid of the partnership and limited company business structures.

Advantages

• Separate legal entity with permanence.
  
  
• Tax transparent.
  
  
• A partner’s liability for business debts is limited.
  
  
• Can give fixed and floating charges as security to third party finance providers

Disadvantages

• The formation is more complicated than for a simple partnership.
  
  
• Registration requirements with Companies House e.g. filing annual accounts and an annual return. 

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Company Limited by Guarantee

Companies limited by guarantee (CLG) are private limited companies where the liability of the members is limited. A CLG does not have a share capital, but has members who are guarantors instead of shareholders.

Limitation of liability takes the form of a guarantee from its members to pay a nominal sum in the event of the company being wound up while they are a member or within one year of their ceasing to be a member.

The amount of money that is guaranteed is often as little as £1 and will be stated within the constitution of the company e.g. the Memorandum and Articles of Association.

Advantages

• Separate legal entity with permanence.
  
  
• Liability of members limited to the amount they agree to guarantee.
  
  
• The company has no shares and therefore membership is easier to transfer in comparison with a CLS.

Disadvantages

• Administrative requirements of, and public disclosure through, Companies House, for example, filing annual accounts and an annual return.
  
  
• Directors must comply with statutory standards of conduct

(please note, the above list is not exhaustive)

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Company Limited by Shares

Companies limited by shares (CLS) are limited companies where the liability of the members is limited. These companies can beprivateor public companies. A CLS obtains financial support from investors in consideration of an interest in that company, a shareholding.

The liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company.

PLCs, whether listed or unlisted, are subject to more regulation thanprivatecompanies.

Advantages

• Separate legal entity with permanence.
  
  
• Shareholders’ liability limited to the price of the shares.
  
  
• Can give fixed and floating charges as security to third party finance providers.

Disadvantages

• Administrative requirements of, and public disclosure through, Companies House, for example, filing annual accounts and annual return.
  
  
• Directors must comply with statutory standards of conduct.

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