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Business Structure

Choosing the best for your business

So the inspiration has hit, you've found the idea to make your first million, what next? With any business venture one of the first things that you will need to decide is the form of business structure to operate within. There are four main types to choose from, each with various advantages and disadvantages. The four are sole trader, partnership, company and limited liability partnership, and they are each considered in brief below.

Sole Trader
This is by far the simplest method of running a business as there are no formal records or registration required. In short this is a one-person business where you keep all the profits but are also liable for all the debts. There is no distinct legal entity for the business, the sole trader is the business. To set up as a sole trader you simply need to register with the Inland Revenue as self-employed. You will then need to keep records of income and expenditure and make an annual self-assessment tax return. Subject to turnover, whichever business structure you choose, you may also need to register for VAT.

Partnership
When two or more people form or run a business together they will usually be in partnership. The partners share the decision-making, the profits and the risk. As with a sole trader there is no separate legal entity and the partners are the business and can be sued individually or jointly. As with a sole trader, there is no limit on liability, however, if one partner is bankrupt, a creditor of the partnership can seek payment from the other partner(s) for the full amount of the outstanding debts. The individual partners are treated as being self-employed for tax purposes and must individually register as such with the Inland Revenue. Whilst there is no specific requirement to do so, it is advisable to draw up a written Partnership Agreement to set out each partner's duties, responsibilities, and share of the business.

Company
A company is a separate legal entity, distinct from the shareholders who own the company and the directors that run the company (though the shareholders and directors are often the same people). A private limited company must have at least one shareholder and at least one director and a company secretary. The company must be registered with Companies House, who maintain a public register containing certain information on all companies. The company must also maintain certain registers and file accounts and a return with Companies House each year together with a small administrative fee. The managers of the company are known as directors and are taxed as employees of the company. In addition the company will be liable for corporation tax on its profits. The biggest advantage of a company is that the shareholders enjoy limited liability and will not be responsible for the company's debts (unless they have given personal guarantees). If the company has more than one shareholder, it is advisable to draw up a written shareholders agreement (similar to a partnership agreement) to cover the relationship between the shareholders.

Limited Liability Partnership (LLP)
The LLP is a relatively new form of business structure that is becoming increasingly popular. The LLP is a hybrid of a normal partnership and a company. Like a partnership the partners (or members as they are also know) share the costs, risks and profits. However, like a company the liability of the members is limited to the amount of money invested (and as in all structures, any personal guarantees), and there are similar requirements for keeping and filing records with Companies House.

Which is right for you?
It is impossible to list the perfect business structure for all types of business, as some forms of businesses may be suitable to more than one type of business structure and can and do work equally well regardless. Often the initial choice of structure will be made with the tax implications of the business in mind rather than the liability of the owner(s). The liability protection whilst desirable is often less important in a new venture because if a loan is required it is common for the lending bank to demand a personal guarantee from the business owner, which removes any advantage of limited liability in a newly formed company.

There may also be tax advantages from starting out as a sole trader or partnership, and you should speak to an accountant to consider these fully. It is worth noting that if you need to change your business structure, it is far easier to start out as a sole trader or partnership and incorporate the business at a later date. A brief overview of the business structures is as follows:

Useful Websites

www.companieshouse.gov.uk - Companies House for further information and to check the public register of companies

www.inlandrevenue.gov.uk - for tax and national insurance information

www.dti.gov.uk - Department of Trade and Industry for information on support and raising finance

www.businesslink.gov.uk - Business Link provides practical advice on key issues such as health and safety, taxes, payroll, records, returns and employing people for the first time.

www.hse.gov.uk - Health and Safety Executive

www.drc-gb.org - Disability Rights Commission. Visit this site to see the implications on employers of the change in the law from October this year in relation to disabled people

Please note that this information is provided for general guidance only and is not intended for use without specific professional advice. Adrian Rogers is a newly qualified solicitor in the Corporate and Commercial department at Brabners Chaffe Street. adrian.rogers@brabnerscs.com

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