Starting a business can be an exciting yet equally daunting process. You’ve had the business idea, assessed the market, created a business plan – so what next? Choosing the right legal structure to suit the needs of your business is a fundamental decision, requiring careful consideration of your long term objectives. There are a number of options available, each with distinct advantages and disadvantages which will need to be aligned with your business goals. This article aims to give you an overview of the options available, as well as some of the key considerations for each legal structure.

Sole Trader

A sole trader is a simple business structure, where the ownership and day-to-day responsibility is in the hands of a single individual. This structure is easy to set up, with low costs associated, so is commonly used as a starting point for businesses.

Sole traders are considered to be self-employed, and all profits made are entirely their own after tax. However, a sole trader will also be personally liable for the losses and debts of the business and this liability is unlimited. 

General Partnership

A general partnership involves the responsibilities for the business being shared between two or more individuals.

The business’ profits and losses are then shared between the partners, often according to a pre-determined partnership agreement which outlines the liabilities and profit split agreed.

All partners are fully responsible for the debts owed by the business as the business does not have a separate legal personality.

Limited Liability Partnership (LLP)

Unlike a general partnership, an LLP has a separate legal personality, meaning it can hold its own assets and enter into contracts in its own right.

The advantage here is that each partner’s liability is limited to their individual investment and any personal guarantees they have given. LLPs also offer credibility, as they are typically associated with professionals, and flexibility in ownership structure, as new partners can be taken on easily.

This structure does incur higher initial fees than simpler business structures. LLPs need to be registered at Companies House and are required to file annual accounts and confirmation statements each year. Generally, the individual partners pay tax on any income.

Limited Company

A limited company is a corporate body with a separate legal personality. Much like an LLP, a limited company can hold assets and enter into contracts in its own right.

The company may be limited by shares, which is more common, or by guarantee and may have one or more shareholders / guarantors who become the Company’s ‘members’. The main benefit of the limited company structure is that the members’ liability is limited to the amount they have invested into the company.

A limited company must have at least one director (although often there are a few) who is responsible for running the company on a day-to-day basis. A director may also be a shareholder in the Company.

All companies will also have a set of articles of association which govern the management and administrative structure of the Company and are filed at Companies House. In addition to this, there may also be a Shareholders’ Agreement regulating the rights and duties of the shareholders.

Key Considerations

Selecting the optimal legal structure for your UK business is imperative for success. Each option outlined above offers its own advantages and disadvantages. It may be helpful to consider the following questions:

What are your long term business goals?

Being a sole trader may offer certain initial advantages – such as being low on costs and administration – and may be a good starting point for a small or low risk business venture.

That said, the limited liability offered by structures with a separate legal personality, such as a limited partnership, is likely to be preferable when looking to grow your business as this will offer much more protection. Business owners will not be held personally responsible for a limited company’s debts beyond the level of their initial investment, meaning that personal savings and assets will be protected.

Furthermore, potential customers may be more likely to work with a registered company due to the perception of credibility and professionalism that this can bring to the business.

How do you plan to finance your business?

Different legal structures may offer different funding and investment options. For example, if you are looking to attract external investors, the limited liability offered by an LLP or limited company is going to be preferable. Additionally, investors are likely to be more confident in supporting an entity with a well-defined structure and clear compliance requirements, as this ensures a level of financial transparency.

How much business administration are you willing to handle?

Simple structures, like sole traderships and partnerships, are easier to set up and maintain, with limited administration and compliance obligations to keep up with.

In contrast, limited companies and LLPs require more complex administration and come with certain disclosure requirements, such as the need to file annual accounts at Companies House or maintain statutory books and registers.

The additional administrative burden will need to be weighed against the added legal protection to determine which is more important to your business needs.

Berry Smith Comment

Choosing between different business structures can be an intimidating decision. There is no one-size-fits-all approach, with different legal structures offering different pros and cons, depending on your business.

Taking legal advice can be valuable in choosing the best structure for your circumstances and giving you the confidence to embark on your business journey with a strong legal foundation.

Our experts at Berry Smith can advise and assist on implementing the right legal structure for your new business, as well as drafting and advising on any key documentation that you may need, such as bespoke articles of association, shareholders’ agreements or partnership agreements.

The Transactional Business Services Team at Berry Smith can provide specialist advice on drafting, reviewing and refining commercial contracts, as well as general commercial and business advice.

Please contact us if you would like more information about the issue raised in this article or any other aspect of Business law at 029 2034 5511.