• Greyfriars Solicitors

Start-up Business Structures




When starting a new business, it is important to consider how the decisions you make now will affect its growth. One such decision is the business structure. There are a number of different business structures, each with their own pros and cons.


Sole trader


As a sole trader, you will be the exclusive owner of the business. As you will be self-employed, you will be entitled to all profits made by the business. However, you will also be liable for all loses incurred by the business. Despite being self-employed, you will have the ability to employ staff.


Advantages

  • Low start-up costs

  • Easy to set-up

  • Full control of the business

  • Minimal financial reporting


Disadvantages

  • Unlimited liability - sole trader is fully liable for the debts of the business

  • Taxed on income

  • Lack of credibility within the market

  • Business will cease to continue on the death/retirement of the sole trader


Traditional Partnership


An extension of the sole trader model is a partnership. A partnership is a business structure between two or more individuals who will share the business's profits and its management.


In a traditional partnership, all partners are responsible for the debts of the business. Each partner will be taxed on their income.


Advantages

  • Low start-up costs

  • Easy to set-up

  • Full control of the business

  • Minimal financial reporting

  • More potential to raise finance


Disadvantages

  • Unlimited liability - sole trader is fully liable for the debts of the business

  • Taxed on income

  • Lack of credibility within the market

  • Business will cease to continue on the death/retirement of the sole trader

  • Difficult to wind-up

Limited Liability Partnership


In a limited liability partnership (LLP), each partner's liability is limited to the amount they invested in the business. An LLP must be registered at Companies House and must begin trading within one year of registration. Again, all partners will be taxed on their income and must register with HMRC as self-employed.


Advantages

  • More potential to raise finance

  • Flexible

  • Partnership agreement sets out terms

  • Advantage of limited company and partnership

Disadvantages

  • Profits will be taxed as income

  • Partners must disclose their income

  • LLP must being trading within one year, or risk being struck off


Private Limited Company


A private limited company is a legal entity separate from its owners. This means that the shareholders' liability is limited to the amount of their investment. A limited company has legal obligations to file documents with Companies House. The company's filing history and director/secretary appointments are publicly available. A limited company must have a director, and have its registered office in the UK.


Advantages

  • Business credibility

  • Easier to borrow money

  • Favourable tax regime

  • Limited liability

  • Less personal financial exposure

Disadvantages

  • Administration and filing requirements

  • Company must be registered before trading

  • Must have a registered office in the UK

  • Regulations regarding company names

  • Annual accounts and financial reports available to the public

Public Limited Company (PLC)


As with a private limited company, a public limited company is a legal entity separate from its owners. The shareholders' liability is limited to the amount of their investment and the value of their shares. A public limited company is legally obliged to have 2 directors, and a minimum of £50,000 worth of shares. As such, this business structure is more suited for larger business enterprises.


Advantages

  • Business credibility

  • Easier to borrow money

  • Favourable tax regime

  • Limited liability

  • Less personal financial exposure

  • Shares can be traded publicly and used for finance

Disadvantages

  • Administration and filing requirements

  • Company must be registered before trading

  • Must have a registered office in the UK

  • Regulations regarding company names

  • Annual accounts and financial reports available to the public

  • High operating costs

  • Minimum of £50,000 worth of shares

  • Minimum of 2 directors

  • Must have at least 1 qualified secretary


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