Legal Structure of a Business Definition Uk

Sole trader, limited company or partnership? This article gives an overview of some of the different legal structures available to the small business owner and how to go about choosing the right legal structure for your business.

What legal structures can I choose?

When you start your own business, one of the first things you'll need to do is choose a legal structure. The type of legal structure you choose will impact on:

• the amount of tax you pay
• the amount of control you have over your business
• the amount of paperwork you'll need to deal with
• any profit your business makes
• your responsibilities if your business makes a loss.

What are the three main types of legal structure?

There main types of business are: sole trader, limited company and business partnership. We take a look the different business legal structures you can choose for your business start up below.

Sole trader

This is the most common and simplest form of business structure. This is where you trade on your own on a self-employed basis.

Find out more

There is no legal distinction between you and your business – you are considered the same entity.

You are in charge of all aspects of your business – you can keep all your business's profits after you have paid tax on them. You will also be personally responsible for any debts of the business.

You will be liable to income tax on profits and be liable to class 4 and class 2 NIC. You will need to file a self-assessment return every year. Once your takings exceed £85,000 per year you will need to register for VAT.

Close

Limited company

Companies are owned by shareholders and run by directors. They can be limited (usually smaller where shareholders are selected) or public (where shares available for purchase on a stock exchange).

Find out more

Most limited companies are limited by shares, meaning the shareholders' responsibilities for the company's financial liabilities are limited to the value of the shares that they own but haven't paid for.  The shareholders of the company will usually have limited liability for debt of the company i.e. they will not be responsible for the debt personally.

There is more administration in relation to a company – every year a limited company must put together statutory accounts and send an annual return to Companies House and a Company Tax Return to HMRC. A limited company must comply to statutory rules and disclose information to the public.

Close

Partnership

A partnerships is made up of two or more individuals who run a business with a view to making a profit.

Find out more

Partners in a partnership will pay tax on a self employed basis, and therefore pay tax and be liable to class 4 and class 2 national insurance (in the same way as a sole trader).

There will be a partnership agreement detailing the money invested by each partner and the terms of profit share etc and partnership accounts will be drawn up.

The partners have unlimited liability in the same way as for sole traders, i.e. they are responsible personally for the partnership debt.

Close

Why does the legal structure matter?

The way in which the business is formed has a great effect on:

• the responsibilities of the owners
• the way in which funds are extracted
• the legal obligations for both the entity the individuals themselves
• the reporting requirements.

What are the main differences?

Different business structures have different responsibilities. We take a look at some of the differences here:

• 

  Income

  Sole traders and partners in partnerships pay income tax on the profits they have made. They will be assessed on an 'accounting period' basis: this usually starts from the point you started trading to a date that suits the business. Many choose to end their accounts on 5 April – to match the end of the tax year. Directors in companies are likely to extract funds in a variety of ways. They may be paid a salary through the company and receive other taxable benefits. However, they are likely to take the bulk of their income as dividends if they are also shareholders. This will be paid out of the profits that remain after the company has paid Corporation Tax.

• 

  Tax

  Individuals, regardless of structure, will pay income tax. Sole traders must send a Self Assessment tax return every year, pay Income Tax on the profits a business makes and pay National Insurance. With a company, the company would also have a corporation tax liability (and other reporting deadlines) usually payable nine months and one day after the accounting period has ended. Use our interactive tool to calculate your Corporation Tax deadline.

• 

  Risk (liability)

  Sole traders and partners have unlimited liability, i.e. they are personally responsible for the debt of the business. Shareholders in companies have limited liability; their loss is usually restricted to the amount paid for their shares. There is a further option available to partnerships known as limited liability partnerships (LLPs). This is similar to an ordinary business partnership, but the liability is limited to the amount of money the business partners have invested or agree to invest in the business. LLPs tend to be solicitors, architects, medical practitioners etc.

• 

  Responsibilities (paperwork, returns etc)

  Sole traders and partners have a responsibility to pay their tax and national insurance through Self Assessment. The partnership itself will have other obligations in relation to the partnership accounts.

• 

  Additional obligations

  Companies have additional obligations in terms of filing accounts, keeping memorandum and articles of association, vouching dividends, paying Corporation Tax, filing P11Ds. A lot of this work is complex and many businesses will work with professional accountants on this.

How should I choose?

Choosing a legal structure will be dependent on the kind of business you have (or plan to have) and there are pros and cons with any business structure.

It is recommended you speak to a professional accountant or tax advisor to ensure that you have the most appropriate legal structure to operate your business.

Can I change to a different legal structure in the future?

Yes, as your business changes/grows, a revised structure may be appropriate or as your personal circumstances change.

It is strongly advised that you seek professional advice before changing your business structure as you will have to meet certain legal obligations.

Brought to you by:

AAT Business Finance Basics

AAT Business Finance Basics are a series of online e-learning courses covering the core financial skills every business needs. They draw from AAT's world-leading qualifications and will quickly build your knowledge on key topics including bookkeeping, budgeting and cash flow.

Visit partner's website

Legal Structure of a Business Definition Uk

Source: https://informi.co.uk/business-administration/how-do-i-choose-legal-structure-my-business

Share this post