Choosing the right legal structure for your business is one of the most important decisions you will make as a business owner.
The business legal structure you choose will determine your personal liability, your tax obligations, and the administrative requirements of your business. In the UK, there are several different legal structures to choose between – let’s explore what those options are.
Sole Trader
The sole trader structure is perhaps the simplest legal structure for a business.
As a sole trader, you generally own and run the business yourself, and you’re personally responsible for all of its debts and obligations. Importantly, this means that you’re personally liable for any debts or losses incurred by the business. You are also liable for all income tax that is owed, however it can be easy to self assess if you feel hiring an accountant to be too costly.
On the positive side, setting up as a sole trader is incredibly straightforward, and there are relatively few administrative requirements.
Partnership
A partnership has a similar structure to that of a sole trader, but it must have at least two owners. Each partner is personally responsible for the debts and obligations of the business, and profits are split between the partners. Again you are liable to pay income tax on any profits that the company makes.
Like a sole trader, a partnership is relatively simple to set up, and has few administrative requirements. However, it’s crucial that you first create a partnership agreement, that outlines details such as each partner’s responsibilities, and how profits will be split.
Limited Company
A limited company is perhaps the most complex legal structure for a business, but it also offers the greatest protection for the owners.
A limited company is a separate legal entity from its owners, meaning that the owners are not personally responsible for the debts and obligations of the business. Instead, the owner’s liability is typically limited to the amount of money they have invested in the company.
Limited Liability Partnership
A limited liability partnership (LLP) is a legal structure for businesses that provides partners with limited liability, meaning that they are only responsible for the debts and obligations of the business to the extent of their investment. An LLP is more complex to set up than a sole trader or partnership, and there are more administrative requirements, including the need to file annual accounts.
Personal Goals
When choosing a legal structure for your business you need to consider your personal circumstances and the goals for your business. If you want to minimise your personal liability, for example, a limited company or LLP may be the best option. If you are looking for a simple and straightforward structure, a sole trader or partnership may be the best thing to do.
Tax Questions
Which legal structure you choose will have implications on your taxes. A limited company is subject to corporation tax on its profits, while a sole trader is often only subject to income tax, depending on turnover. You should also consider the legal requirements of each structure, and whether you’re prepared to meet these requirements.
When choosing a legal structure, it’s important to consider your personal circumstances and the goals for your business, as well as your tax obligations and administrative requirements – this can be carried out through personal research, but also with the assistance of specialist company law solicitors.
