Choosing a business structure other than a company
Introduction
When you start a new business, choosing a business structure is an important task. Which you choose has implications on how much tax you pay, whether and what you need to register, your day to day paperwork load, your liability for things that go wrong and so on.
In this article, we explain the pros and cons of a number of popular business structures. We have not included the company simply first, there are many types of company and second, if you require a company structure, it will be fairly obvious.
Sole trader
Being a sole trader is the simplest way to run a business: it does not involve paying any registration fees, keeping records and accounts are straightforward, and you get to keep all the profits. However, you are personally liable for any debts that your business runs up, which make this a risky option for businesses that need a lot of investment.
Set-up
You need to register as self-employed - see the page in this guide on self-employment.
Management and raising finance
You make all the decisions on how to manage your business.
You raise money for the business out of your own assets and/or with loans from banks or other lenders.
Records and accounts
You have to make an annual self assessment tax return to HM Revenue & Customs.
You must also keep records showing your business income and expenses.
Profits
Any profits go to you.
Tax and National Insurance
As you are self-employed, your profits are taxed as income.
You also need to pay fixed-rate Class 2 and 4 National Insurance contributions on your profits.
Liability
As a sole trader, you are personally responsible for any debts run up by your business. This means your home or other assets may be at risk if your business runs into trouble.
To be a sole trader, a partner, or a member of a limited liability partnership as an individual rather than a company, you must be self-employed - and registered as such with HM Revenue & Customs (HMRC). This does not mean that you can't also do other work as an employee, but the work you do for your business must be done on a self-employed basis.
Partnership
In a partnership, two or more people share the risks, costs and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.
Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns dies or goes bankrupt, the partnership must be dissolved - although the business can still continue.
A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.
Set-up
Each partner needs to register as self-employed employed - see the page in this guide on self-employment.
It's a good idea to draw up a written agreement between the partners. For further advice, consult an accountant or solicitor.
Management and raising finance
Partners themselves usually manage the business, though they can delegate responsibilities to employees.
Partners raise money for the business out of their own assets, and/or with loans.
It's possible to have 'sleeping' partners who contribute money to the business but are not involved in running it.
Records and accounts
The partnership itself and each individual partner must make annual self-assessment returns to HM Revenue & Customs (HMRC).
The partnership must keep records showing business income and expenses.
Profits
Each partner takes a share of the profits.
Tax and National Insurance
As partners are self-employed, they are taxed on their share of the profits.
Each partner also needs to pay Class 2 and 4 National Insurance contributions.
Liability
Creditors can claim a partner's personal assets to pay off any debts - even those debts caused by other partners.
In England, Wales and Northern Ireland, partners are jointly liable for debts owed by the partnership and so are equally responsible for paying off the whole debt. They are not severally liable, which would mean each partner is responsible for paying off the entire debt. Partners in Scotland are both jointly and severally liable.
However, if a partner leaves the partnership, the remaining partners may be liable for the entire debt of the partnership. Also, a creditor may choose to pursue any of the partners for the full debt owed in the case of insolvency.
Limited liability partnership (LLP)
A limited liability partnership (LLP) is similar to an ordinary partnership - in that a number of individuals or limited companies share in the risks, costs, responsibilities and profits of the business.
The difference is that liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. This means that members have some protection if the business runs into trouble.
Set-up
Each member needs to register as self-employed - see the page in this guide on self-employment.
There is no restriction on the number of members, but at least two must be designated members - the law places extra responsibilities on them.
If the LLP reduces in number and there are fewer than two designated members then every member is deemed to be a designated member.
LLPs must register at Companies House.
It's a good idea to draw up a written agreement between the members. For further advice, consult an accountant or solicitor.
Management and raising finance
Usually the members manage the business, but can delegate responsibilities to employees.
Members raise money out of their own assets and/or with loans.
Records and accounts
The LLP itself and each individual member must make annual self-assessment returns to HM Revenue & Customs (HMRC).
All LLPs must file accounts with Companies House.
An annual reminder letter will be sent to the LLP a few weeks before the due date requesting they download the form from the Companies House website. It needs to be completed and returned to Companies House with the appropriate fee.
Profits
Each member takes an equal share of the profits, unless the member’s agreement specifies otherwise.
Tax and National Insurance
Members of a partnership pay tax and National Insurance contributions (NICs) on their share of the profits.
The profits of a member of an LLP are taxable as profits of a trade, profession or vocation and members remain self-employed and subject to Class 2 and 4 NICs.
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Do not provide a complete or authoritative statement of the law;
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