Business Legal Structures
Legal Structures for
businesses in the UK
A legal structure is simply a set of rules (as laid down by the law) which determine how you govern and run your organisation.
In the eyes of the law legal structures are either unincorporated or incorporated.
Incorporated businesses are entities that independent from the owners , while unincorporated businesses are simply extensions of their owners.
Basically, this means that owners of unincorporated businesses are generally personally liable for the business’s debts and liabilities in the event of insolvency, while the owners of an incorporated business are generally not liable for the debts and liabilities of the business.
There are 6 main business legal structure types each prescribing different rules relating to key matters like personal liability for business debts , working with co owners, filing accounts and returns, public accountability, etc.
It is up to you to decide which legal structure is best for your business and then follow the rules relating to that structure going forward.
The Six Business Legal Structures
As mentioned above, there are 6 main business legal structure types each of which are described below
A sole trader is a small business that is owned by one person who takes on all the responsibility for the running the business.
As the sole owner of the business he/she enjoys all the benefits of being their own boss and is entitled to keep all net profits ( or personally bear all the losses)
Other good things about sole proprietorships include the fact that they are relatively easy to form and run (compared to other legal structures) and the owner is taxed under the flexible self assessment system.
As the accounts for sole traders are filed at HMRC (rather than Companies House) the affairs of the business are kept private so your earning will be not available to the general public.
However, a major downside to sole traders is that they are unincorporated structures which means the owner is personally liable for the debts and obligations of the business if it gets into financial difficulties.
Another disadvantage is that sole traders generally find it harder to attract outside investment if needed .
Partnership are businesses where two or more parties (the partners) jointly manage and operate the business as co owners. The partners in a business partnership invest in the business, and each investor/partner usually (but not always) has a share in the profits and losses.
There are three legal structures that relate to partnerships, namely General Partnerships (GPs), Limited Partnership (LPs) and Limited Liability Partnerships (LLPs).
O General partnerships
General partnership are the most easiest way for two or more people to own and run a business together in the UK. It involves simply writing up a partnership agreement, registering the partners and the business for self assessment and then you are ready to go.
General Partnerships are unincorporated legal structures which mean the personal assets of the partners are at risk from creditors if the business cannot pay it`s debts.
Worse still, any partner can end up being responsible for the debt of other partners, even if the partner who caused the debt leaves.
Finally, if one of the partners resigns, dies or goes bankrupt, the partnership will have to be dissolved (i.e. the agreement between the partners) although but the business will still be able to continue.
O Limited partnerships
A limited partnership is in many ways similar to a general partnership except it must have at least one general partner and at least one Limited partner. General partners are partners who participate in managing the partnership and limited partners are partners who invest money but do not participate in the management.
The limited partners will only lose the money they’ve invested in the partnership (and not their personal assets) if the business becomes insolvent. The genera partners, on the other hand, have full liability for the partnership`s debts.
Unlike general partnerships, limited partnerships must register with Companies House but don't generally have to make an
annual return or file accounts.
Given the above, limited partnerships are a good option for co owned businesses where one or more of he owners are ` silent partners` with invested funds expecting a return on their investment.
O Limited liability partnerships (LLPs)
Limited liability partnerships (LLPs) are similar to general and limited partnerships in terms of operation and tax liability but unlike other partnerships are incorporated legal structures. Therefore, the partners of a LLP will only lose money they’ve invested in the partnership (and not their personal assets) if the business becomes insolvent.
The main downside to LLPS is that they have to file annual returns and accounts with Companies House. This means that the income of the firm will be made public knowledge and personal income levels of the different partners could be estimated.
A limited company is an organisation that is owned by shareholders. Shareholders are people (or other organisations) that have acquired portions of the company called `shares` which entitles the holder to a slice of the business profits and ,in many cases, a say in the running of the business.
Generally, the more shares held by a person the more control and rights to profits that person has. Profits are distributed to these shareholders (in proportions to held shares) via dividends (sums of money paid quarterly or annually) after paying tax on the profits.
Most new small businesses that adopt the limited company structure are the owners of the business (i.e. shareholders) and work for the business. As such they can be paid two ways:
(1) a wage or a salary for work carried out.
(2) dividends on the shares owned.
The main advantage of a limited company is that is an incorporated structure which means the owners (i.e. the shareholders) are not personally liable for the debts of the business in the event of the business winding up.
Other advantages include money can be raised by selling shares in the business and that they have a great professional image.
The main disadvantage of limited companies is that they have to file annual returns and accounts at Companies House where they are available for the public scrutiny.
Choosing the correct structure
For most new potential business entrepreneurs face when starting a business is whether to operate as sole trader or limited company – it’s the decision that
the wrong legal structure can be very damaging to what you want to achieve and changing it at a later date can be problematic and costly. So it is important you get it right from the outset.
Every case is different so there is no standard approach.
The best way to start is by assessing your project in relation to factors like whether you want to share responsibility for running the business with one or more co owners, the scale and level of risk, and your funding /investment requirements.
Once you have done this assessment you can then select the legal structure that best accommodates these factors.
So, for example, it would make sense to choose the sole trader legal structure if you were going into business as a painter and decorator, using your own van and having received a loan of £2,000 from a family member.
Support & Guidance
If after reading this guide you are still not sure which legal structure is best for you please contact us and we will give you further guidance.