Choosing the right legal structure for your business is an important aspect of future-proofing your company.
There are multiple legal business structures to choose from, which will vary depending on size and scope of operation, taxable turnover and many other factors.
Each of these structures has different implications in terms of business responsibilities, obligations, tax liability and so on – and each will bring different potential benefits or protections, so choosing the right one is important.
Sole traders are the simplest and most popular business structure for SMEs, while establishing a PLC is more complex.
Read on for a description of each structure, and find out which one could best suit your business.
A sole trader is self-employed, and owns and runs a business as an individual (if you’re not sure which employment terminology you should be using for yourself, we’ve made it a little bit clearer here).
As a sole trader, you’ll have several obligations: you’ll need to register for Self-Assessment Tax and file an annual tax return. You will also be solely responsible for business debts.
You only need to register for VAT if your annual turnover is greater than £85,000, and your National Insurance Contributions will also fall in to one of two categories, depending on your annual turnover.
Finally, there are some limitations on what you can call your business; you won’t, for example, be able to use the word “accredited” in your company’s name unless it is approved by the Department for Business, Energy and Industrial Strategy.
This is because “accredited” is considered a sensitive word which could imply a connection with (or approval by) government departments. You can see a full list of sensitive words here.
If you’ve got a unique name, you may want to consider trademarking it to stop other companies from operating under the same name.
Unlike a sole trader, a business partnership is exactly what it sounds like; you and at least one partner (or several partners) share responsibility for all areas of the business.
This includes exposing yourselves to losses as well as expenses for stock and equipment. Equally, business profits are shared amongst all partners, and each partner pays their appropriate share of tax.
Partners can include limited companies, which will be explained in more detail below.
When registering as a business, one of the partners must be the ‘nominated partner’ who is responsible for managing tax matters and keeping business records.
The nominated partner must also register the partnership with HMRC. All other partners will need to register separately for tax purposes, and if turnover is above the VAT threshold of £85,000 per year, you’ll need to register for VAT, too.
A private limited company (PLC) is a business which is legally a separate entity to its shareholders and directors.
As a result, PLCs are also financially separate from its directors and management. All profits after tax go to PLCs. PLCs are supported by shareholders, with at least one director managing the company.
When registering a PLC, the following details must be provided to Companies House: number of shareholders (and shareholders with more than 25% shares or voting rights), a memorandum and articles of association, an address and business name, and an SIC code.
Once all the above information has been provided to Companies House, the business can be incorporated. That’s a lot to take in, so here’s a breakdown of each:
Memorandum and articles of association
A memorandum is simply a legal statement which agrees to the formation of the company. It must be signed by all initial shareholders, and it cannot be changed once the company is registered.
Articles of association are rules about how the company will be run, agreed by shareholders and director(s). You can use standard articles or write your own.
An SIC code (standard industrial classification of economic activities) helps to identify which industry your PLC will operate within and the nature of the business being carried out.
Next, you’ll need to appoint at least one director. Directors ensure that company accounts and reporting mechanisms are accurate.
Limited companies are owned by shareholders. There must be at least one, and they can hold 100% of the shares. However, shares are likely to be spread more widely around. This limits shareholder liability (potential loss through bad performance).
When issuing shares, you need to provide a statement of capital, which details the number of shares and their total value.
Address and name
As with sole traders and partnerships, there are sensitive words which cannot be used without permission. There is also the distinction between a business name and a trading name (see here for more information).
Also, your business needs to be registered at a UK address.
As a PLC, you’ll pay a special rate of tax, called corporation tax. You need to register for this within three months of registering your company.
A social enterprise is a completely different sort of organisation than any of the above, and your business will have to benefit people or communities.
Companies with social or charitable aims (like charities, community interest groups and co-operatives) all fit under this umbrella.
These businesses will need a community interest statement which explains the aims of the company. This will also be assessed by the community interest company regulator.
Remember, if in doubt, or to get the most up-to-date information on legal business structure, make sure to check the Gov.UK website by clicking here.
For more complex matters, make sure to seek professional advice – as with all aspects of business, getting off on the right foot can be the difference between leaping ahead and falling behind.