LEGAL BUSINESS STRUCTURES
INFORMATION ON HOW TO SET UP A UK-BASED BUSINESS OR COMPANY OR FOR-PROFIT MINISTRYLEGAL BUSINESS STRUCTURES
The legal structure of a business in the UK is a foundational decision that impacts everything from how you pay taxes to the personal risk you assume as an owner. It dictates the relationship between the business and its owners in the eyes of the law. Let's explore the key aspects affected by this choice.
The business structure directly determines the type of tax you pay. A sole trader or a partnership is not a separate legal entity from its owners, so profits are treated as personal income. The owner(s) must register for Self Assessment with HMRC and pay income tax and National Insurance contributions on their share of the profits. In contrast, a limited company is a separate entity that pays Corporation Tax on its profits. The company's owners, or shareholders, then pay personal income tax on any salary or dividends they take from the company. A Limited Liability Partnership (LLP) offers a blend: it's a separate legal entity, but its members are still taxed individually on their share of the profits, similar to a traditional partnership.
Each structure comes with a different set of administrative and legal duties. A sole trader has the simplest requirements, mainly needing to keep records for tax purposes. A partnership should have a formal partnership agreement to define the responsibilities and profit-sharing arrangements among partners. The most complex is a limited company, which has significant ongoing responsibilities. These include registering with Companies House, filing annual accounts, and submitting a confirmation statement each year. The company must also comply with the Companies Act 2006. An LLP also has similar filing requirements to a limited company, including a confirmation statement and annual accounts.
This is one of the most critical differentiators. A sole trader and the partners in a traditional partnership have unlimited liability. This means there is no legal separation between the business and the owners. If the business incurs debts, the owners are personally responsible for them. This puts their personal assets, such as their home or savings, at risk. In contrast, a limited company and an LLP provide limited liability. This means the business is a separate legal entity from its owners. The financial liability of the owners is limited to their investment in the business (e.g., the value of their shares). Their personal assets are generally protected from business debts. This protection is a major reason many businesses choose a limited company or LLP structure, especially if they are taking on significant financial risk.
Sole Trader: This is the simplest structure to set up. The business is owned and run by a single person who is personally responsible for all business debts. There is no legal distinction between the owner and the business, meaning the owner has "unlimited liability". Profits are taxed as the owner's personal income.
Partnership: This structure involves two or more people who share ownership and responsibility for a business. Like a sole trader, partners have "unlimited liability" for the business's debts. Partners share the profits, and each partner pays tax on their share as personal income. A partnership agreement is highly recommended to outline the rights and responsibilities of each partner.
Limited Company (Ltd): A limited company is a separate legal entity from its owners (shareholders). This structure provides "limited liability", meaning the owners' personal assets are protected if the business goes into debt or is sued. The company's finances are separate from the owners' personal finances. Limited companies pay Corporation Tax on their profits, and directors must file annual accounts with Companies House.
Limited Liability Partnership (LLP): An LLP is a hybrid structure that combines elements of a partnership and a limited company. It is a separate legal entity, providing "limited liability" to its members (partners), similar to a limited company. However, the members are taxed as self-employed individuals, similar to a traditional partnership. This structure is often used by professional services firms like law and accountancy practices.