Choose A Legal Structure For Your Business
Choose A Legal Structure For Your Business
Choose A Legal Structure For Your Business
1. Overview
You must choose a structure for your business. This structure will
define your legal responsibilities, like:
sole trader
limited company
business partnership
You can form an unincorporated association if youre setting up a
small organisation like a sports club or a voluntary group and dont
plan to make a profit.
You can use other structures for businesses that help people or
communities, eg social enterprises.
2. Sole trader
If you start working for yourself, youre classed as a selfemployed sole trader- even if youve not yet told HM Revenue and
Customs (HMRC).
As a sole trader, you run your own business as an individual. You can
keep all your businesss profits after youve paid tax on them.
You can employ staff. Sole trader means youre responsible for the
business, not that you have to work alone.
Youre personally responsible for any losses your business makes.
Find out how to set up as sole trader.
Tax responsibilities
You must:
3. Limited company
A limited company is an organisation that you can set up to run your
business - its 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
Limited by shares
Most limited companies are limited by shares. This means that the
shareholders responsibilities for the companys financial liabilities are
limited to the value of shares that they own but havent paid for.
Company directors arent personally responsible for debts the
business cant pay if it goes wrong, as long as they havent broken the
law.
Example
A company limited by shares issues 100 shares valued at 1 each
when its 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 theyve each not paid for.
Private company limited by guarantee
Directors or shareholders financially back the organisation up to a
specific amount if things go wrong.
Public limited company
The companys shares are traded publicly on a market, such as the
London Stock Exchange.
You can also consider setting up a private unlimited company as an
alternative legal structure. Directors or shareholders are liable for all
debts if things go wrong.
How to set up a limited company
You must register the company with Companies House and let HM
Revenue and Customs (HMRC) know when the company starts
business activities.
Read more about setting up a private limited company.
Tax responsibilities
The liability for debts that cant be paid in a limited partnership is split
among partners.
Partners responsibilities differ as:
The partners in an LLP arent personally liable for debts the business
cant pay - their liability is limited to the amount of money they invest
in the business.
Partners responsibilities and share of the profits are set out in
an LLPagreement. Designated members have extra responsibilities.
Read more about how to set up and run an LLP.
Tax for limited liability and limited partnerships
Overview
Sole trader
Limited company
'Ordinary' business partnership
5. Limited partnership and limited liability partnership
6. Unincorporated association
7. Change your business structure
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.
sole trader
business partnership
limited company
limited partnership
limited liability partnership (LLP)
Tell HM Revenue and Customs (HMRC)
If you want to close down your existing business structure, follow the
usual steps.
To no longer be a sole trader
Youll need to:
For more advice on the practical aspects of setting up a PLC, or converting an existing private
company into a PLC, go to the Incorporation Services Limited website.
Unlimited companies
Many people refer to a sole trader's business or a partnership as an unlimited company, but such
businesses are not in fact companies. It is possible to register at Companies House a private
company which is unlimited, that is the members accept complete liability for the company's
debts. If the company needs money to pay its debts a call can be made on each of the
shareholders to contribute a fixed amount on each share held by them.
An unlimited company has all the other features of a private company limited by shares. It is
registered at Companies House, has members (usually shareholders), directors, articles, etc. Its
one major advantage is that it is not required to register annual accounts at Companies House.
This type of company is suitable for a business where the risk of insolvency is very low or nonexistent, or where it is important not to put the company's accounts on the public register at
Companies House. There are few unlimited companies, but this may be because their existence
and advantage are not widely appreciated.
For more advice on the practical aspects of forming an unlimited company company and running
it once registered,contact Incorporation Services Limited.
another organisation which itself has an asset lock, such as a charity, or another CIC. With every
application to form a CIC, a Community Interest Statement must be lodged, with the usual
documents, when seeking company registration. This statement, signed by all the directors, must
describe the company's objects and certify that the company is formed to serve the community
rather than for private profit. CICs can be limited by shares or by guarantee. For more
information about CICs, go to the Community Companies website.
or vice versa.
Existing companies can convert themselves into CICs but such conversions require the approval
of the CIC Regulator. Where the company converting to a CIC is a charity, the permission of the
Charity Commission is needed for a change of name.
For more advice on the practical aspects of converting one type of company to another, please
contact Company Law Solutions.
TYPES OF COMPANY
The following gives a brief guide to the various types of companies that can be incorporated in the UK and
their various principal characteristics. More detailed information can be found under each separate heading
within this section and in the customer support section. Use this list and the links provided to help decide
which company formation you need.
The types of company we can incorporate for customers include:
Objects unrestricted
Limited companies are often advantageous for their shareholders regarding taxation
Takes longer to complete registration of new directors and transfer shares to new owners
More expensive
A Guarantee company is not owned by its members and cannot be transferred by its members for
value it has no share capital
Some input required from client to establish main objects if required or objects can be unrestricted
A private company can be converted to a PLC, so most PLCs start life as normal private companies and
convert at a later date prior to flotation of the stock markets
Suitable for new and existing partnerships wishing to obtain limited liability status, and aimed
particularly at professional partnerships such as accountancy and solicitors firms
Beneficial for property developers planning to sell flats or apartments in a development once
completed
Can be used to spread the freehold of a number of flats across the individual owners allowing easy
transfer and sale of each flat
Can be used purely as a vehicle to manage the maintenance of a property comprising of several flats
or apartments
Allows leaseholders to purchase freehold properties or acquire the rights to manage a property under
the Commonhold and Leasehold Reform Act 2002
Intended for use by social enterprises who wish to utilise their profits and assets for public benefit