Choosing the right legal structure for your business

Before starting your business, you will need to choose a legal structure which suits you best. The two main types are ‘sole trader’ and ‘limited company’. Sole traders are often referred to as ‘self-employed’. If you want to set up with one or more people you can also set up a partnership. There are also a number of structures for not for profit organisations.

Sole trader

Sole traders register with HMRC and complete an annual self- assessment. This tells HRMC what their income is over the year and they are taxed accordingly. They also register with HMRC for national insurance contributions.

As a sole- trader you are personally liable for any business debts.

This is a simple business structure and suitable for businesses with low financial risks. You can still employ people when you are a sole trader and can choose a business name.

It is possible to change from sole trader to limited company at a later date.

Limited companies

A private limited company has a separate legal identity to its owner. This means that as an owner you have limited liability for financial claims. This gives you more protection for your personal finances than when you are a sole trader.

As well as registering with HMRC a limited company also needs to be registered with companies house. Your information including address and your accounts will be published and anyone can look this up.

As a limited company, legally another company cannot set up using the same business name.

A limited company can be set up with only one person who will be the director and the only shareholder. When the company is incorporated, shareholders buy shares issued by the company.

Partnerships

Two sole traders can set up a partnership and you will each have liability for business debts. A partnership agreement can be drawn up by a solicitor which will clarify what will happen in various situations.

A partnership can also be limited by registering with Companies House, this gives limited liability for business debts. This is a limited liability partnership (LLP). A partnership agreement is also best practice for LLPs.

Not for profit organisations

These include charities, social enterprises and registered societies.

Community interest companies (CICs) are companies that trade commercially as a social enterprise. They have a clear social objective and have restrictions on how they distribute their profits. A CIC is registered with the Office of the Regulator of Community Interest Companies.

A private company limited by guarantee does not have shareholders and cannot distribute profit to its members. The profits (surplus) are re-invested into the company.

Solicitors and accountants can advise on the best legal structure for you.

 

Written by Alex Shoobert, Business Advisor at the btc

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