Every business within the United Kingdom must have a legal structure either as a sole trader, as a limited company or as a partnership.
A sole trader is a self-employed person who is the sole owner of their business. This is the simplest business structure in the UK.
Sole traders have unlimited liability, since the law does not regard the person as a separate entity from the business. This means that if the business gets into debt then the business owner is personally liable. A sole trader may therefore lose personal assets if things go wrong.
Sole Traders must file a tax return every year. To set up as a sole trader you must tell HMRC that you pay tax through Self Assessment. You can register for Self Assessment through this link to the government website: https://www.gov.uk/register-for-self-assessment.
Learn more: Self-employed or Limited Company
A limited company is a type of business structure that has its own legal identity, separate from that of its owners (shareholders) and managers (directors). This remains so even when it is run by only one person who is both its shareholder and its director.
A limited company can be more tax efficient than a sole trader since it pays Corporation Tax on its profits at a more lenient tax rate than Income Tax. A limited company may also claim a wider range of allowances and tax-deductible costs than may a sole trader.
There are three main types of limited company in the UK:
Learn more: What is a Limited Company?
The majority of new companies that are formed in the UK are companies limited by shares. This is the standard “Limited” or “Ltd” business structure for any company which has been formed with the intention of generating profit for its owners.
It is remarkably popular because it allows the sharing of profits among the shareholders while also offering restricted financial liability. The shareholders are responsible only for company debts up to the value of the shares which they hold in the company. Their personal assets will therefore be protected should the company encounter financial difficulties.
Learn more: What is a Private Company Limited by Shares?
A Private Company Limited by Guarantee is a type of company that is commonly used by non-profit organisations such as clubs, sports associations, community projects and charities.
It protects the personal finances of the company owners in a way similar to a company limited by shares. Instead of having shareholders and shares, however, it has guarantors and guarantees. The guarantors' financial liability is restricted to the amount of money that they guarantee when forming the company.
Rather than the company owners sharing profits, any money that is made is paid back into the company to help further the organisation’s aims. In some cases the owners may take a share of the profits but, by doing so, they will relinquish the company's right to apply for charitable status.
Learn more: What is a Private Company Limited by Guarantee?
A public limited company (“PLC” or “plc”) is a type of company commonly associated with companies listed on the stock market whose shares may be freely sold to and traded by the public. This, however, is not a kind of company that we normally help to form.
The LLP structure is often formed by those in industries in which they traditionally work as a partnership, such as a legal practice, an accountancy practice or an architects practice. The primary benefit of an LLP over a traditional partnership is the limited liability protection which it gives its partners, much like a private company that is limited by shares, which means that their personal finances are protected in the event of the firm encountering difficulties.
An LLP is also beneficial in that it allows the partners to remain somewhat separate, with each partner being responsible for paying their own individual income tax via Self-Assessment rather than the business being responsible for paying corporation tax.
Learn more: Limited Liability Partnerships
Two or more persons who intend to conduct a business together for profit may form a partnership. A traditional partnership is based upon a partnership agreement with no need to register at Companies House.
A general partnership is not a separate legal entity. Its partners generally have unlimited liability, so they are responsible for the debts and losses of the business much like a sole trader, which liability they share. This type of business is mostly associated with professional services such as solicitors, accountants and doctors.
A limited partnership (LP) is a business association which consists of one or more general partners, who are liable for all obligations of the firm, and one or more limited partners. A limited partner contributes a certain amount to the partnership and is liable for the debts or obligations of the business only up to the value of what he-or-she has contributed.
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