Business Structures

There are three main types of business structures to choose from for your business in the UK. They vary in terms of scale, liability and investors. It is also possible to start off with one structure and move to another one, for example a sole proprietorship can expand to a limited liability company. In this guide, you will be informed on the basics of all the business structures and the benefits and disadvantages of them all.

(i) Sole Trader
(ii) Partnership
(iii) Limited Company

Whether you’re just starting out or deciding on the right structure for your existing company, understanding the law around business organization is important. You’ll have to assess the nature of your business to figure out which option will afford you the most benefits.

Sole Trader
This is the most common structure for online store owners, and also the easiest to run and set up. To become a sole trader, Business Start Smart can assist with registering with HM Revenue & Customs before or as soon as possible after you begin to conduct business. There is a penalty for late registration.

With this structure, your business is not a separate entity from you. A sole trader does receive all profits, but is also personally liable for all debts or legal action taken against the business.

This common and simple structure is ideal for a shop with little risk of liability.

Pros
(i) Easy to set up and run.

(ii) Control of all business
decisions and profits.

Cons
(i) Not a separate business entity.

(ii) You are responsible for all debts or actions against the company.

Partnership

A partnership is another common structure for small businesses. These are formed when two or more individuals are co-owners of a business venture. This structure allows individuals to pool their assets and skills to increase their chances of success.

Setting up a partnership is simple. You must choose a “nominated partner” who will register the partnership with HM Revenue & Customs. This will automatically register that person for self-assessment. The remaining partners will then have to do the same.

Like a sole trader, a partnership is not a separate legal entity from its owners. This means the partners are personally liable for all debts and obligations of the business. An additional consideration is that all partners are liable for the actions of the others in relation to the business. One partner may be responsible for the debt of another if their assets are insufficient to cover an obligation.

With this form of organization, remember to focus on the human element. There’s always a chance that a friendly partnership can change in the future. For this reason, make sure to have a lawyer assist you when drawing up a partnership agreement. Selecting the right partner is important because you’re liable for the debts and actions that they incur on behalf of the business.

Agreements & Considerations
A well-drafted and balanced agreement should include:

(i) Names of partners and how new partners can be added.
(ii) An outline of the business.
(iii) Investment, liability and profit share of each partner.
(iv) Steps outlining what happens if partnership is dissolved.

Pros
(i) Allows for a division of labor.

(ii) Partner brings more capital investment.

Cons
(i) Not a separate entity.

(ii) Jointly liable.

(iii) Business relationship can sour.

Company
Running a company has many benefits and does increase your credibility as a business. The process is more complicated but has many potential benefits for your online shop.

To assist with starting and  operating as a Limited Company, Business Start Smart can register the company on your behalf and inform HMRC of the new company . The process of registering is also known as incorporating. A company is a separate entity from its owner, meaning it has its own liabilities, debts and profits. You are not personally financially liable for what happens to the company. This is a good business structure if your company is growing and has a greater potential for liabilities.

3 Steps to Incorporation
Company Name
Before you begin the process, you must choose a name, need help with name look at our services.

Required Elements
Company name and registered address — Name & address must comply with rules above.

One director — This individual is legally responsible for running the company.

Shareholders — Individuals with a stake in the company.

Memorandum of association — Statement made by the relevant parties saying they intend to form a limited company.

Articles of association — These are the agreed upon rules that the company has to follow.

There are somewhat complicated and detailed components to this business structure. It’s a big decision to register and incorporate your business, and you should consult a lawyer prior to submitting an application.

Pros
(i) Separate entity.

(ii) Limits your financial liability.

(iii) The corporation survives the death of shareholders or sale.

(iv) Tax advantages.

(v) Improves your credibility.

Cons
(i) Heavily regulated.

(ii) Extensive record keeping.

(iii) More expensive then the others to form (fees associated with incorporation).

Choosing a business structure
It’s important to consider the unique aspects of your business when deciding which organizational structure to choose. Although some options have benefits on paper, they may not be a worthwhile option for you. There are detailed and helpful resources available from the United Kingdom Government. Before finalizing your decision, consult a lawyer to make sure you’ve made a sound choice and that the process is completed properly.

 

 

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