Business and company structures
If you are thinking about setting up in business for yourself, either as a small business, or entrepreneur, part-time or full-time, then you need to consider what business structure is best for your needs.
A sole trader is the simplest and the most popular business structure, because it only requires a single person to create it. The business, and the business owner, are essentially seen as one entity by the law.
One advantage of a sole trader is that the business owner can make all the decisions, allowing them maximum control over their entire business.
You are seen as self-employed, therefore any profits made are entirely your own.
A significant disadvantage is that you are solely responsible for the losses of the business, which may also affect your personal assets, as you have unlimited liability. Both income and losses are taxed on the individual’s personal income tax return.
When it comes to choosing a name for your business, you can use your own name, a fictitious name, or a trading name. However, any trade name will be just that, it will not allow you to separate yourself from the business.
The sole trader business structure is very popular because it’s quick and easy to start and set up, with minimal costs, compared to the other structures. It is often a good starting point for a new business that can then change its structure in due course, as it expands.
Six sole trader facts
Being a sole trader is the same as being ‘self-employed’.
As a sole trader, you run your business as an individual.
You can choose any business name (subject to certain rules), or your own name.
As a sole trader, you don’t need to have a separate business bank account.
All your business profits can be taken by you after you’ve paid the tax you owe.
You are personally liable for any business debts you may incur.
A partnership is an extension of the sole trader structure. They are ideal if you find starting your business by yourself daunting, or have an experienced partner in mind.
This structure is suitable for two or more partners that will share the responsibility of the business, as well as the rewards.
The responsibilities and liabilities can vary and will be linked to the share ownership of the partners.
Depending on what you are looking for, sharing the business decisions and the direction of the business can be both a positive and a negative factor.
Partnerships are reasonably easy and inexpensive to set up. With a partnership structure, all business partner owners act on behalf of the business. They also share the profits according to their share of the business, which should all be highlighted in a partnership agreement.
It is also worth noting that if one partner has incurred debt, all partners are responsible for it. This is known as a ‘joint or several’ liability.
Three advantages of partnerships
1. Greater capital and financing – The combining of the individual resources of each partner, helps to raise a larger capital sum and financial buffer. It can also make it possible for an individual with the knowledge, product, or invention but no money, to team up with someone who has money and is interested in a joint partnership.
2. Broader business knowledge – The ownership of a business by two or more people, makes it possible for them to pool their skills, knowledge, and judgment, for the benefit of the business.
3. Legal recognition – There is a partnership law that regulates the relationship between partners themselves, and between the partners and their partnership. This provides more clarity and certainty within the business and could help to avoid disputes.
Three disadvantages of partnerships
1. Personality clashes – Business partnerships require cooperation, trust, and dedication. A failure on the part of any one of the active partners to carry out their duties and responsibilities properly, could lead to personality clashes, and the end of the partnership.
2. Unlimited liability – Each partner is held liable for the obligations of the partnership. If one of the partners makes a costly mistake in the execution of the affairs of the partnership, creditors can sue, and if they obtain a judgment against the partnership, each partner may have to sell his or her personal assets, to meet these costs.
3. Short shelf life – Partnerships often have a relatively short life, as many factors can lead to the end of the partnership, for example, death, ill-health, bankruptcy, disqualification, or marital and family issues.
Types of partner
There are four potential types of partner:
a general partner, who is involved in the day to day running of the business.
a sleeping partner, who has invested in, but does not ‘run’ the business.
a limited company can become a partner.
there can also be a salaried partner, who receives a regular salary from the partnership but does not have a stake in the business itself, so doesn’t own any part of it.
TIP: If you do set up in business with other people, you should draw up a ‘deed of partnership’ to detail who does what, and what happens if things go wrong.
A limited company is very different from the partnership and sole trader business structures, because a limited company is a separate entity to the business owner.
The business owner and the business itself are separate from each other in terms of the law, and the business is its own ‘legal person’, meaning it is responsible for its finances. This means, that limited companies offer something called “limited liability”, meaning you are not personally responsible for the losses and debts of the business.
This fact, as well as some other advantages, make the limited company structure the most popular among small to medium-sized businesses.
A limited company can be owned and controlled by just one person, or many people. It is not unusual for small limited companies to be owned by family members, as this can be very tax-efficient, for both wages and dividend payments.
Setting up and running a limited company, where you become a director and shareholder, is one of the most tax-efficient ways of working, and it has several other advantages as noted below.
There is some extra administration and paperwork involved, which you should be prepared for, but a limited company accountant will be able to help you with this.
Three advantages of limited companies
More credible-looking – Limited companies look more professional, and some clients will only deal with such companies and not sole traders.
Tax-efficient – As limited companies can incur expenses as a tax-deductible cost, they are more tax-efficient.
Separate entity – Provides business owners, and directors, with protection should the business fail.
Three disadvantages of limited companies
More complicated to set up – You must follow the correct process for setting up your company to comply with the law. Some people leave this process to their accountant, although you can do it yourself.
Accountancy costs – As proper accounts must be produced each year, extra costs can be incurred by getting your accountant to do it for you.
Public records – Your business's performance will not be confidential, as you must publish your accounts each year, showing your profits or losses.
TIP: If you are planning to set up in business yourself, it is worth looking into a Ltd company structure, as they are very tax efficient for owner directors and employees. Business owners can spend before they are taxed, employees are taxed before they can spend.
Public limited companies
Public Limited Companies or (PLCs) are usually much larger organisations. Unlike the other types of limited company, they may offer their shares to members of the public, and be listed on a stock exchange, like the FTSE 100 or AIM.
A PLC must have two directors or more, and the company secretary must be qualified. PLCs are subject to much more rigorous accounting scrutiny than their smaller counterparts.
In many cases, standard limited companies are converted into PLCs at a later date in their development, when the business need arises. This could be when they need a significant capital injection for expansion.
Three advantages of public limited companies
Ability to raise capital – Public limited companies can easily raise additional capital, by issuing new shares.
Wide shareholder base – The more varied the shareholder base, the more the risk is spread amongst fellow investors and shareholders.
Prestigious profile – Companies that reach a PLC status are often viewed as reaching a prestigious position, compared to other competitors.
Three disadvantages of public limited companies
Owners can lose control – It is possible that the original owners could lose overall control if new shares are bought by third parties.
Director’s aims – Professional directors on the board may have different aims and ambitions than the original shareholders, that can cause friction.
Public records – PLC businesses must disclose all their main accounts to the markets regularly.
Ten business administration facts
Starting your own business and overseeing its operation is very different from being an employee, with many more balls to juggle all at the same time. This list will provide you with ten basic administration items you will need to consider if you do choose the route of running your own business.
You must pay your tax and National Insurance liabilities on time.
The self-employed pay Class 2 (weekly) and Class 4 (annually) National Insurance Contributions.
You may need to set up a pension scheme.
If you employ other people, you will need to operate a PAYE payroll scheme and collect taxes from your employees on behalf of HMRC.
You must register for VAT if your annual turnover is £85,000 or more.
You must keep accurate records of all your business transactions, including all sales and expenses, and bank records.
Your business records should be kept safe for a minimum of six years.
You may need to take out compulsory or voluntary insurance.
You may need an accountant to help with year-end accounts.
Limited companies also have to file a confirmation statement each year.