What Is the Best Structure for My UK Business?

When choosing your business structure, you must weigh the pros and cons of each option. Key factors to consider include:

• costs;
• the complexity of processes;
• protection of assets;
• tax; and

Your choice should align with your long-term business goals and the specific needs of your industry. This article will help you decide on the best business structure by explaining:

1. incorporated and unincorporated structures;
2. the four most common business structure types; and
3. the advantages and disadvantages of each.

Unincorporated Businesses Structures

Unincorporated businesses start automatically as soon as you begin trading. No formal process is required to create them, which means they may be created unintentionally. It’s crucial to note that, if you own an unincorporated business, you are personally responsible for the business’ debts and obligations. This is because there is no legal separation between the business and yourself personally, i.e. your personal assets and liabilities.

Knowing this difference is important when deciding if an unincorporated structure is right for your business.

An Example

Imagine owning a work van used solely for your business, a home shared with your spouse, and recently paying £20,000 for building materials for a construction job. However, the client has not paid you yet for the construction job and these materials, and you also owe a mortgage on your house.

When managing your finances, you might separate business and personal assets for clarity, such as:

However, these distinctions do not exist under the law in an unincorporated business structure. Instead, everything is viewed as part of your personal assets and liabilities, like this:

As a result, there is no separation between your business and personal finances. If, say, your business is sued (e.g. for an injury claim), you risk losing your personal assets, including your home, to cover the costs (except for what is protected by insurance).

Sole Traders

Being a sole trader, sometimes called self-employed, is extremely popular in the UK and is a common kind of unincorporated business. If you sell luxury watches, cut hair, or babysit, you are likely a sole trader. Unless you take specific steps to set your business up differently, for example, by establishing a company, you automatically trade this way.

You must register for self-assessment with His Majesty’s Revenue & Customs (HMRC) if you operate a business as a sole trader.

Partnerships

A partnership arises automatically when two or more people run a business intending to make a profit. These are often called:

• ‘ordinary partnerships’;
• ‘general partnerships’; or
• ‘unincorporated partnerships’.

The Partnership Act 1890 regulates partnerships. The Act will apply unless partners have a written or oral agreement outlining their terms. As such, you should come to an express agreement on each partner’s duties and responsibilities.

Unincorporated partnerships cannot own assets in the partnership’s name. Assets like offices or machinery are bought in the partners’ names and held ‘on trust’ for all partners.

Incorporated Business Structures

An incorporated business operates as a separate legal entity. For instance, an incorporated company can:

• enter into its own agreements;
• own assets;
• take responsibility for its own liabilities; and
• sue and be sued.

Typically, owners and representatives of the company do not bear personal responsibility for its debts unless in specific circumstances. However, they do share in its profits. Unlike unincorporated businesses, you are usually not personally liable for the company’s debts.

Company Limited by Shares

A company limited by shares, also known as a limited company, accounts for most private companies registered in the UK. Ownership of a company limited by shares is based on share allocation to each shareholder.

As a shareholder, you are generally only liable for the value of your shares, also referred to as equity. If the private company fails to repay its debts, shareholders are only responsible for the unpaid amount on their shares, unless they have provided separate legal guarantees. However, company directors have certain duties for the company and can be held personally liable if they breach their director duties.

Setting up a limited company involves strict regulations, extensive documentation, and ongoing administrative responsibilities.

Limited Liability Partnerships (LLP)

An LLP is a form of legal business entity with limited liability for its members. To structure a business as a limited liability partnership, you must work with at least one other person, similar to unincorporated partnerships. LLPs allow partners to define the terms of their agreement, including profit sharing and mutual responsibilities.

The LLP itself owns the business assets and is responsible for its debts. Members of the LLP act as its agents and are generally only liable up to the amount they have contributed as a member or as otherwise specified in the LLP agreement between the members.

Key Takeaways

Choosing the right business structure for your new business is essential for your future success and protecting your business interests. While unincorporated structures offer flexibility and fewer administrative tasks, they expose you to unlimited personal liability for debts. Incorporated structures, such as limited companies and limited liability partnerships, provide greater liability protection. However, they involve more administrative duties, especially for directors.

Choosing the best structure depends on your business size, goals, and vision for the future. Consider your priorities carefully, seek expert advice, and select the structure that supports your ambitions. The right decision today could shape your business’s success tomorrow.