The legal structure of your business will have a big impact on your responsibilities and taxation. If it becomes apparent as your business grows and changes that an alternative structure would be better for your business, you can change your business structure but this can give rise to significant costs and tax liabilities. Therefore it is important to give proper consideration to the structure that you are going to use at the outset, having in mind your future plans.
The most common business structures adopted in England and Wales are, sole trader; limited company or partnership.
Similar business models are available in many other jurisdictions and were are able to assist in advising businesses based not only in England and Wales but globally.
Sole Trader
As a sole trader, you run your own business as an individual and there is no separate legal entity. A sole trader makes all the decisions, owns all the assets of the business and can keep all the profits after tax and any other required payments have been made. However, a sole trader has unlimited liability for the debts, liabilities and obligations of the business.
There are few filing requirements for a sole trader, no documents have to be filed with Companies House and information about the business therefore remains private, e.g. the accounts only need to be submitted to HMRC and do not become a public document.
Limited Company
A limited company is a vehicle through which the owners of the limited company operate their business. A limited company is a separate legal entity in its own right and can own assets, enter into contracts and incur liabilities.
One of the main advantages of a limited company is that its owners (shareholders or members) have limited liability for the debts, liabilities and obligations of the company.
Directors are responsible for managing the day to day affairs of the company and most decisions the company make will be made by the directors, acting in the best interest of the company. Provided that they have complied with their duties as a director, a director will generally not have liability for the debts, liabilities and obligations of the company.
The paperwork and filing requirements for incorporated companies are substantial. Every official meeting and decision of the directors and shareholders needs to be documented, statutory registers need to be maintained and accounts and confirmation statements (formerly an annual return) need to be filed annually with Companies House. the majority of information filed with Companies House is available to the public.
Limited companies can take a variety of forms including:
- Company limited by shares. This is the most common form of company and issues shares to its members. A holder of shares has the right to receive dividends, vote at a meeting of shareholders and receive payment on a return of capital (e.g. on liquidation). These rights can be removed or varied so that different shareholders participate in the company in different ways.
A company limited by shares can be private or public (i.e. listed on a recognised stock exchange). Additional onerous rules and regulation applies to a public limited company.
- Company limited by guarantee. No shares are issued, instead members are issued with membership certificates which entitle them to vote at members meetings. Companies limited by guarantee are usually used for non-profit making businesses.
Partnership
Partnerships can take several forms:
- General Partnership – This is a partnership that automatically forms when two or more persons carry out a business together with a view to making a profit. The partnership does not have its own legal personality and each individual partner is personally liable for the debts, liabilities and obligations of the partnership.
A general partnership is governed by the Partnership Act 1890 which implies various terms into the relationship. A partnership agreement can be entered into by the partners that sets out the basis of the relationship which can differ to the implied terms of the Partnership Act 1890.
As with a sole trader, there are few filing requirements for a general partnership, no documents have to be filed with Companies House and information about the partnership therefore remains private.
- Limited partnership – A limited partnership has to be registered at Companies House pursuant to the Limited Partnership Act 1907 although it does not have separate legal personality.
A limited partnership is similar to a general partnership except that it has two different types of partner, a general partner and a limited partner.
A general partner (there must be at least one) has day to day management of the business of the partnership and have unlimited liability for the debts and obligations of the partnership; and whereas a the limited partner(s) has no involvement in the management of the partnership business and have liability for the debts and obligations limited to the amount of capital that they have contributed.
A limited partnership does not have to file accounts with Companies House but does need to make filings on the happening of certain events, e.g. changes to partners.
- Limited Liability Partnership (LLP) – An LLP is considered to be a cross between a limited company and a partnership, offering the limited liability of a limited company with the wider flexibility of a partnership.
An LLP is a separate legal entity in its own right and can own assets, enter into contracts and incur liabilities. The partners of an LLP have limited liability for debts, liabilities and obligations of the LLP with their liability limited to their capital investment in the business.
As with a general partnership it is common for the partners of an LLP to enter into an agreement which sets out their rights and obligations to the business in respect of a variety of matters, including right to participate in profits, liability for debts and responsibility for management.
How can we help?
If you need advice or you have any concerns about how to structure your business, the experienced solicitors at Herrington Carmichael are able to provide expert, specialist legal advice on business structuring and re-structuring.
Please contact Jo Noddings on 01189 899712 or at [email protected].
This publication reflects the law at the date of publication and is written as a general guide only – it is not intended to contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.