Guide to Start-ups Step 3: How to choose your business structure

26th January 2018

With business plan and name in hand, it’s now important to think about how your business will work. Thinking about what kind of structure your business has may seem overwhelming at first, but choosing the right one to fit you is extremely important. Establishing a business entity structure requires you to consider factors like the amount of capital you can raise, the type of liability and how easy it is to set up the business type. We’ve helped break down the pros and cons of each to help you choose.

Sole Trader

This is where you and the company you create are one and the same. As Sole Trader you are the owner of the business and are directly affected by the profit or loss that is generated.

Pros:

Minimal set up.
Flexibility – you can make quick decisions about the business and implement them without consultation.
No need to register at Companies House, though you should notify HRMC.
Fewer regulations and tax filing requirements.

Cons:

Unlimited liability – your assets could be seized if your business goes into debt.
There is greater personal risk as you are not protected from loss or legal action.
The business owner pays personal tax on profits.

NB: A Partnership operates on a similar basis to Sole Traders, except a more formal agreement is drawn up between partners and generally profit share depends on how much each partner contributes.

Private Limited Company (LTD)

Unlike sole trader status, a private limited company is a legal entity in its own right. This means that its owner or owners have limited liability when it comes to potential losses. To set up a private limited company, you’re required to appoint at least one director over the age of 16, have a registered office in the UK, comply with government regulations and issue at least one share at time of incorporation.

Pros:

The liability of shareholders is limited to the value of their shares.
Potential tax advantages.
Lower taxes than Sole Traders.
Records must be submitted to Companies House, which affords a level of transparency which is attractive to clients.
Only require 2 members to start an LTD.

Cons:

Annual financial records must be submitted to Companies House, which can be a time consuming activity.
Restrictions on how many shares can be sold.
The sharing of power between Directors and shareholders can lead to disputes.
Shares are difficult to transfer.
Subject to more regulations that a Sole Trader or Partnership.

Public Limited Company (PLC)

PLCs also exist as legal entities in their own right, but they require a minimum of 7 members to get started.

Pros:

The liability of shareholders is limited to the value of their shares.
Potential tax advantages.
Lower taxes than Sole Traders.
Records must be submitted to Companies House, which affords a level of transparency which is attractive to clients.
Shares can be transferred with ease.

Cons:

Annual financial records must be submitted to Companies House, which can be a time consuming activity.
A minimum of £50,000 worth of shares must be issued.
The sharing of power between Directors and shareholders can lead to disputes.
High operating costs.
Subject to more regulations that a Sole Trader or Partnership.

Limited Liability Partnership (LLP)

An LLP exists as a cross between a Partnership and a company, meaning that it can operate like a Partnership but has the limited liability of a corporation, since an LLP is its own legal entity. The difference is that an LLP is run on private agreements. A good example of an LLP is a law practice or accountancy.

Pros:

Less paperwork than a corporation while retaining the liability advantage.
Personal assets are protected from the negligence of the partner.
A private agreement can give the company more flexibility.
By registering at Companies House, you can stop another company from using the same name.

Cons:

Income is considered personal and is taxed accordingly.
An LLP cannot issue shares.
An LLP must have two members and must be dissolved if one leaves.
Private information (such as home address) may be on display at Companies House.

Still not sure? Search our Dot Londoner’s map portal for a business similar to yours. Click through to their websites and you’ll usually find out what business type they are in their terms & conditions.

Next – Step 4: How to finance your new business
Previous – Step 2: How to choose the perfect business nam e