The term ‘business structure’ refers to the legal structure of an organisation. This determines the responsibilities of the business, amount of tax as well as type of activities it can undertake. As a result, business owners need to familiarise themselves with various features of each structure in order to decide the best structure for their business. In this article, we will first highlight the differences between incorporated and unincorporated businesses and then consider the main types of business structures. We will begin with unincorporated businesses such as sole traders, partnerships and limited partnerships and end with incorporated businesses.
Incorporated vs Unincorporated
An incorporated business exists as a legal entity which is separated from its owners or managers. An advantage of this independent legal entity is that owners are not generally responsible for debts of the business. An unincorporated business does not have a legal entity of its own and as such, individual owners have full personal liability for debts. Below, we consider various types of businesses.
Types of Businesses
A sole trader is a self-employed person who runs a business. The operation can be in any field and profession from an engineer to a dog walker. A sole trader can have a number of employees but there is only one person who owns the business, bears the liabilities and loses or benefits from the profits.
A partnership exists when a minimum of two people establish a business together. The Partnership Act 1980 defines partnership as ‘carrying on a business in common with a view of profit’. A partnership can be as simple as two people running a shop together or as complicated as a multinational firm with hundreds of employees.
As with sole traders, partners are self-employed and taxed separately. This means that individual partners pay income tax for their share of benefit and if they are companies, they will be liable for corporation tax on their share of benefit.
Limited Partnership (LP)
This type of business is similar to a general partnership in that it has at least one person with unlimited liability. However, unlike general partnerships, LPs are allowed to have partners with limited liability. The limited partner cannot:
- control or manage the LP,
- have the power to take binding decisions on behalf of the LP; or
- remove their contribution to the LP for as long as it is in business.
The Limited Partnerships Act 1907 governs the operation of LPs.
Companies are the most common form of incorporated businesses. They can take various forms from private or public to limited by shares or limited by guarantee.
Companies formed in the UK have to register certain documents with the Registrar of Companies in accordance with the requirements of Company Act (CA) 2006.While sole traders and partners can run their business straight away and without even realising that their business fits the definition, companies are subject to formalities before being allowed to operate.
One of the biggest advantages of establishing a business as a company is its legal entity is separated from those who own the business. As such, the shareholders’ responsibility will be limited to the price of their shares if any debts arise.
Unlike private companies that are owned by private investors and shareholders such as founders or managers, a public limited company(plc) can raise money by offering shares to the public. This is probably the main advantage of being a public company as they can obtain capital from a larger pool of investors to finance their operations.
A public limited company must comply with the requirements of the CA 2006 to be able to register as a public company. Generally, private companies are subject to less regulations than public companies as they don’t offer their shares to the public. Note that it is not possible to start a company as a publicly traded company; it only becomes an option if the business reaches a certain size, reputation or level of growth.
Limited liability Partnership (LLP)
An LLP is formed under Limited Liability Partnerships Act 2000.
Although, similar to companies, LLPs have a separate legal entity and are run with the same level of flexibility and informality of partnerships. Partners in an LLP are taxed as if they were in a partnership (they are registered as self-employed with HMRC).
Many people who wish to set up a business will be indecisive as to which business structure to choose. The answer to this question depends on many factors such as tax, liability, public information, formalities and costs. As an example, people who want to keep their business private and do not disclose their information may choose to operate either as a partnership or as sole traders. Additionally, partnerships and sole traders can be set up without any legal or administrative cost or formalities and accordingly.
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The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.