Choosing the right business structure: A simple guide

One of the first decisions when starting a business is choosing its legal structure. It might not sound exciting, but the structure has its own advantages and disadvantages. These advantages can be less administration, handling liability, taxation and scope for growth.

There is no single “best” option for everyone. The right choice depends on the individual business, its plans, the risk and other factors.

Sole trader

A sole trader is the simplest way to run a business. In short, where you are carrying out work then you are doing so as a sole trade. You and the business are the same ‘entity’.

This is a common option for freelancers/ consultants, trades and small businesses. There’s no formalities to set up, and less admin. You do the work and you get paid for that work.

The main thing to understand is personal responsibility. If the business gets into debt or faces a legal claim, the sole trader is personally responsible. That can mean personal savings or other assets are at risk.

This works well when you are starting out or testing an idea. But if the business grows, hires staff, or takes on more risk, it may be worth looking at whether a limited company would offer better protection.

You will need to register with HMRC for self-assessment, keep proper records of the income and expenses, and potentially register for VAT.

Limited company

A limited company is one of the most popular options for businesses that want to grow. The company itself is its own person, and the company can sign agreements, employ staff, own property and has its own expenses and income.

There are two main roles with a limited company; the role of a director and the role of shareholder.

- Where you own shares in the business you own the business as a shareholder, and have rights to the profits, called dividends.

- The role of director is the person within the business who directs the business and makes the decisions for the company, such as signing a contract or hiring staff on the company’s behalf.

The main benefit of a limited company is limited liability. In most cases, shareholders are only responsible for the value of their shares, which can help protect personal assets if the business runs into problems.

There can be advantageous tax elements to a limited company, but there is also flexibility with growth and in the long run. You can sell shares in the company to an investor, or a business partner, you can have split ownership which isn’t equal, and also it is advantageous for a future sale.

For a future sale, a buyer would acquire the shares of the business, versus the assets (including contracts) from a sole trader. There is also the argument that a limited company may provide a more established or professional image of your business.

The downside is that there is usually more admin. Companies must file annual accounts and confirmation statements, keep proper records, deal with corporation tax, and make sure directors meet their legal duties.

If there is more than one shareholder, a shareholders’ agreement is often worth having. This can help cover how decisions are made and individual roles, what happens if someone wants to leave, how shares can be transferred, and dispute resolution.

Partnership

Where there are more than one of you, and you don’t have a limited company (i.e. you are two sole traders) then this is called a partnership. This is where two or more people run a business together and own it personally and equally.

In simple terms, a partnership is the same as a sole trader but with one or more individuals. It still includes personal liability for debts and obligations, with added risk that your partner can commit the partnership on behalf of each other.

Limited liability partnership

A limited liability partnership, or LLP, sits somewhere between a partnership and a limited company. It is registered at Companies House and is a separate legal entity in its own right.

In general, the people running an LLP have limited liability, which means their personal assets are usually better protected if the business cannot pay its debts. There are exceptions to this in law, and contract (such as a personal guarantee with a bank).

An LLP does come with more paperwork than a standard partnership. It has to file accounts and confirmation statements at Companies House, and it should have a clear LLP agreement covering how it is run, how profits are shared, how members join or leave, and how disputes are dealt with.

Charities, social enterprises and community interest companies

Not every organisation is mainly set up to make profit for its owners. Some are created to support a social, charitable, or community purpose.

A charity must have charitable purposes only and must operate for the public benefit. Charities can benefit from public trust and certain tax reliefs, but they also face specific rules and restrictions. For example, profits must be used to support the charity’s purpose rather than being paid out to private individuals.

A community interest company, or CIC, is often used by social enterprises. It is a type of limited company designed for businesses that want to benefit the community. A CIC can trade, employ staff, and make a

profit, but it has an asset lock, which means its assets and profits must mainly be used for its community purpose.

Final thoughts

The best structure depends on the people involved, the level of risk, tax, funding plans, and long-term goals. What works well at the start may not be the best fit later on as the business changes.

If you would like to discuss structuring your business, then you can reach out to Chamber Member Acumen Law, who can be reached through their website here, or by calling 01273 447 065.

If you want to contribute to the Chamber blog, contact us on hannah@brightonchamber.co.uk