2.1- BUSINESS STRUCTURE TO CHOOSE

1. Overview
You must choose a business structure when you start a business.

The structure you choose will define your legal responsibilities, like:
• The paperwork you must fill in to get started
• The taxes you’ll have to manage and pay
• How you can personally take the profit your business makes
• Your personal responsibilities if your business makes a loss

Types of business
Most businesses in the UK are:
• sole traders
• limited companies
• business partnerships

If you’re setting up a small organisation like a sports club or a voluntary group and don’t plan to make a profit, you can form an ‘unincorporated association’.

2. Sole trader
What ‘sole trader’ means
You’re a sole trader if you’re running your own business as an individual. You can keep all your business’ profits after you’ve paid tax on them.
You can take on staff – ‘sole trader’ means you’re responsible for the business, not that you have to work alone.

Legal responsibilities
You’re personally responsible for:
• any losses your business makes
• bills for things you buy for your business, like stock or equipment
• keeping records of your business’ sales and spending

How to set up as sole trader
You must register with HM Revenue & Customs (HMRC) as soon as you can after starting your business.

If you register later than 5 October in your business’ second tax year, you could be charged a penalty.

Sole traders’ tax responsibilities
You must:
• send a Self Assessment tax return every year
• pay Income Tax on the profits your business makes
• pay National Insurance
• You must also register for VAT if you expect your business’ takings to be more than £79,000 a year.

3. Limited company

What a limited company is
A limited company is an organisation that you can set up to run your business.

It’s responsible in its own right for everything it does and its finances are separate to your personal finances.

Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits.
Ownership

Every limited company has ‘members’ – people or organisations who own shares in the company.

Directors are responsible for running the company. Directors often own shares, but they don’t have to.

Legal responsibilities
There are many legal responsibilities involved with being a director and running a limited company.

Most limited companies are ‘limited by shares’.

This means that the shareholders’ responsibilities for the company’s financial liabilities are limited to the value of shares that they own but haven’t paid for.

Example
A company limited by shares issues 100 shares valued at £1 each when it’s set up. Its 2 shareholders own 50 shares each and have both paid in full for 25 of these.

If the company goes bust, the maximum the shareholders have to pay towards its outstanding bills is £50 – the value of the remaining 25 shares that they’ve each not paid for.

Company directors aren’t personally responsible for debts the business can’t pay if it goes wrong, as long as they haven’t broken the law.

Other types of company
Most companies are private companies limited by shares. There are 3 other types.

Private company limited by guarantee
Directors or shareholders financially back the organisation up to a specific amount if things go wrong.

Private unlimited company
Directors or shareholders are liable for all debts if things go wrong.

Public limited company

How to set up a limited company
You must set up the company with Companies House and let HM Revenue & Customs (HMRC) know when the company starts business activities.

Every financial year, the company must:
• put together statutory accounts
• send Companies House an annual return
• send HMRC a Company Tax Return

The company must register for VAT if you expect its takings to be more than £79,000 a year.

If you’re a director of a limited company, you must:
• fill in a Self Assessment tax return every year
• pay tax and National Insurance through the PAYE system if the
company pays you a salary

Companies where shares are traded publicly on a market, like the London Stock Exchange.

4. ‘Ordinary’ business partnership
In a business partnership, you and your business partner (or partners) personally share responsibility for your business.

You can share all your business’ profits between the partners. Each partner pays tax on their share of the profits.

Legal responsibilities
You’re personally responsible for your share of:

• any losses your business makes
• bills for things you buy for your business, like stock or equipment

If you don’t want to be personally responsible for a business’ losses, you can set up a limited partnership or limited liability partnership.

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 in a
partnership.

5. Limited partnership and limited liability partnership

Limited liability partnerships
The partners in a limited liability partnership aren’t personally liable for debts the business can’t pay. Their liability is limited to the amount of money they invest in the business.

Limited liability partnerships are most often set up by professional services firms, like solicitors or accountants.

Limited partnerships
The liability for debts that can’t be paid in a limited partnerships is unequally shared by its partners. This means:

• ‘general’ partners can be personally liable for all the partnerships’ debts
• ‘limited’ partners are only liable up to the amount they initially invest in the business

6. Unincorporated association
An ‘unincorporated association’ is an organisation set up through an agreement between a group of people who come together for a reason other than to make a profit, eg a voluntary group or a sports club.

You don’t need to register an unincorporated association, and it doesn’t cost anything to set one up.

This isn’t a legal structure, so the association won’t be recognised by the law. Individual members are personally responsible for any debts and contractual obligations.