How to Choose the Best Business Structure for Your Company

Starting a business can be daunting, but if you start by choosing the best business structure for your company from the beginning, then things can be a lot easier.

There are many different business forms to choose from, therefore we’ve put together this quick and simple guide to choosing the right business type for your new business start-up:

1. Sole Trader

If you’re a sole trader, you run your own business as an individual and you are self-employed.

  • You can keep all your business’ profits after you’ve paid tax on them.
  • You’re personally responsible for any losses your business makes.
  • You must also follow certain rules on running and naming your business.

If you're not sure about your status, contact us to check what counts as self-employed.

Naming your business

As a sole trader, you can trade under your own name, or you can choose another name for your business. You don’t need to register your name.

However, you must include your name and business name (if you have one) on official paperwork, for example invoices and letters.

Business names

Sole trader names must not:

  • Include ‘limited’, ‘Ltd’, ‘limited liability partnership, ‘LLP’, ‘public limited company’ or ‘plc’.
  • Be offensive.
  • Be the same as an existing trade mark.
  • Contain a ‘sensitive’ word or expression, or suggest a connection with government or local authorities, unless you have permission to do so.

2. Partnership

A partnership is the simplest way for two or more people to run a business together. You are jointly responsible for your business’ debts, but each partner pays their own tax on their share of profits. You also have joint accounting responsibilities, although often one partner is chosen to be the nominated partner for dealing with HMRC.

Setting up

In a partnership, you and your partner (or partners) personally share responsibility for your business. This includes:

  • Any losses your business makes.
  • Bills for things you buy for your business, like stock or equipment.

It is wise to draft a partnership agreement which will provide clarity on how to share the business’ profits, how to join or exit the partnership and how to deal with disputes.

Note: a partner doesn’t have to be an actual person. For example, a limited company counts as a ‘legal person’ and can also be a partner particularly in joint ventures or projects.

Working on a laptop

3. Limited Company

If you form a limited company, the business’ finances are legally separate from your personal finances, and there are more reporting and management responsibilities that fall on you as a company director.

Director's responsibilities

As a director of a limited company, you must:

  • Follow the company’s rules, shown in articles of association.
  • Keep company records and report changes.
  • File your accounts and your Company Tax Return.
  • Tell other shareholders if you might personally benefit from a transaction the company makes.
  • Pay Corporation Tax.

4. Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is a hybrid of a partnership and a limited company; it gives you the benefit of limited liability for debts that comes with a company, but you will not pay corporation tax.

Instead, you are taxed on your share of profit as if you were in a partnership. The owners of the LLP are described as the members and there is no issued share capital - profits are drawn according to the LLP agreement.

5. Community Interest Company (CIC)

A CIC is a normal limited company with extra features to mark it out as a Social Enterprise. The key added feature is that CICs come under the regulation of the office of the CIC Regulator, whose job is to make sure that the CIC is genuinely a Social Enterprise and is not abusing the trust that the public expects to put in a Community Interest Company.

Road map to starting a business

By putting the company under the Regulator's scrutiny, the directors of a CIC can clearly demonstrate that the company is genuinely a Social Enterprise venture and not for private profit. A Community Interest Company can be established for any lawful purpose as long as its activities are carried on for the benefit of the community. This is different from a charity, which must be established exclusively for charitable purposes.

A CIC can be limited by guarantee or shares and those which have shares can pay out dividends. However, these are capped.

More Information

As you can see, there are many different form for businesses and we hope this guide to choosing a the best business structure will be of assistance when you decide which is the right business type for your start-up.

For more information and advice on starting a business, do not hesitate to contact us at Hill Lillis with any questions you may have, especially regarding finance. After all, you’re not going into business for the finance administration and legalities; you want to focus on what you do best.

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