Comparing Business Structures

When you start a business, there are a variety of different business structures that you can choose. Below is a comparison of the different options. It has to be said that it is rare for a start up to proceed directly to plc

Sole Trader/Proprietor

• Single person in business
• Who to tell/register with: Notify HMRC that you are self-employed. It is straightforward, inexpensive and fast to set up.
• Legal Structure and Liability: No legal separation between the person (as a private individual) and the business. The proprietor is liable for the business debts and obligations
• Owners, managers and capital: The sole proprietor is the owner and manager. The sole trader puts the capital into the business.
• Profits & Taxation: Profits are taxed as they arise and as part of the sole-trader’s personal taxable income. Class 2 & Class 4 NICs may also be payable if profits are high enough.

Partnership

• Two or more people in business together
• Who to tell/register with: Notify HMRC and choose a nominated partner who is responsible for the partnership tax return. No legal separation between the people (as a private individuals) and the business partnership. It is still fairly straightforward to set up.
• Legal Structure and Liability:The partners are jointly (and severally) liable for the business debts and obligations. (ie each partner can be held liable for debts.). It is a good idea to have a partnership agreement.
• Owners, managers and capital: The partners are the owners and managers. The partners put the capital into the business.
• Profits & Taxation: The partnership must complete a tax return. But each partner is taxed as a self-employed individual on their share of the partnership profits. Profits are also subject to Class 2 & Class 4 NICs.

Limited Liability Partnership (LLP)

• Two or more people in business together with limited liability
• Who to tell/register with: Must be registered at Companies House.
• Legal Structure and Liability: An LLP is a separate legal entity from the partners. The ordinary partners are jointly and severally liable for business debts and obligations.  The limited partner is only liable up to their capital investment. It is still a good idea to have a partnership agreement.
• Owners, managers and capital: The partners are the owners and managers. The partners put the capital into the business.
• Profits & Taxation: The partnership must complete a tax return. But each partner is taxed as a self-employed individual on their share of the partnership profits. Profits are also subject to Class 2 & Class 4 NICs.

Limited Partnership

• Two or more people in business together, some partners are “ordinary”/”general” partners and some partners are “limited partners”
• Who to tell/register with: Must be registered at Companies House
• Legal Structure and Liability: The general partners are in the same position as a standard general partnership.  The limited partners have limited liability and cannot take a management responsibility and cannot make binding agreements on behalf of the partnership. You will still need a partnership agreement.
• Owners, managers and capital: The partners are the owners and managers. The partners put capital into the business.
• Profits & Taxation: The partnership must complete a tax return. But each partner is taxed as a self-employed individual on their share of the partnership profits. Profits are also subject to Class 2 & Class 4 NICs.

Private Limited Company (“Ltd” or “Limited”)

• Limited company whose shares are held privately
• Who to tell/register with: Must be registered at Companies House
• Legal Structure and Liability: The company is a separate legal entity from the directors and shareholders (owners). If you are forming a limited company with more than one shareholder, do make sure you have a shareholders’ agreement in place.
• Owners, managers and capital: The shareholders are the owners of a company and put the capital into the company.  Directors manage the company (and may also be shareholders)
• Profits & Taxation: The company pays corporation tax on its profits. Directors may draw a salary, which counts as a business expense (salaries count as personal taxable income and NICs may also be payable). Shareholders can receive dividends on after tax profits. There is an annual tax free dividend allowance and further dividends are taxable. Directors may also reclaim busines expenses (which may also reduce corporation tax).

Public Limited Company (“Plc”)

• Limited company whose shares may be freely traded to the public
• Who to tell/register with: Must be registered at Companies House (and must have a minimum of £50,000 share capital)
• Legal Structure and Liability: The company is a separate legal entity from the directors and shareholders (owners)
• Owners, managers and capital: The shareholders are the owners of a company and put the capital into the company.  Directors manage the company (and may also be shareholders). Accounts must be audited.
• Profits & Taxation: The company pays corporation tax on its profits. Directors may draw a salary, which counts as a business expense (salaries count as personal taxable income and NICs may also be payable). Shareholders can receive dividends on after tax profits. There is an annual tax free dividend allowance and further dividends are taxable. Directors may also reclaim busines expenses (which may also reduce corporation tax).

Partnership and shareholder agreements perform a similar function – they set out the entry/exit terms for new partners or shareholders, respectively. For partnerships, it will layout the capital contribution of each partner. In limited companies, the capital contribution is given by the shares and payment for the shares.