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Company types – benefits and drawbacks

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There are a number of different legal company structures in the UK, some of which are very obscure (Unlimited Company anyone?), we have focused on four of the most popular below, as these are the most likely types that you might consider when starting a new business or encounter as a small company. Yes, we know you may well deal with PLC’s in running your business, but those companies are typically very large and no-one considering a public offering should be reading a guide on what company structure is best for them…

So what are the benefit and drawbacks of the common types of UK company structures? Our summary of Sole Trader, Limited Companies, Partnerships and Limited Liability Partnerships is below:

Sole Trader

A Sole Trader is essentially you as an individual. It is not an incorporated company (i.e. one registered with Companies House) and regulation is therefore minimal. Often this is referred to as self-employed.

Typically Sole Traders have one owner, who works on the company on a day to day basis. It does not mean (despite the name) that you have to be a one-person band, many Sole Traders employ staff and some can become quite large, however, it is more common that Sole Traders tend to be smaller firms and are often just an individual.

Sole Traders are not required to file annual accounts or maintain statutory records, they are only responsible for ensuring that their personal Tax returns are filed correctly and ensuring their tax is paid. They may be VAT registered and must be if their turnover exceeds the VAT limit (currently £85,000 per year within the UK). Therefore accounting costs are lower than for other company types.

It is very easy to become a Sole Trader, you simply start trading, however, you are required to notify HMRC that you are self-employed, for the purposes of tax collection.

The single largest downside to being a Sole Trader is that there is no limitation of liability. In other words, all the risk is your own, so if the business fails for any reason, you will be personally liable for any debts. Potentially also, it could be said that Sole Traders do not have the same reputation as a registered company, although this is an attitude which is starting to change.

Limited Liability Company (Ltd)

This is the most common type of incorporated company (at least in the UK). Limited Liability Companies are registered at Companies House and are classed as individual entities in their own right, in layman’s terms this means that the company is considered to be a person, albeit one that has other people responsible for its actions (the director/directors).

The biggest benefit to starting a Limited Liability Company is, as its name suggest, the fact that the personal assets of the shareholders and directors are, for the most part, protected and any debts the company might have belong to that company. There are exceptions to this (such as personal guarantees on loans), however, many business owners prefer to go this route for the protection that it offers.

There are potential tax benefits to running a Limited Liability Company, with different rates for Corporation Tax compared to Income tax and various government incentives for businesses, however, these benefits need to be balanced against the increased costs of compliance to run a Limited Liability Company.

Limited Liability Companies require a minimum of one Director and Shareholder (these can be the same person). The company must register with Companies House and HMRC and has legal obligations to fulfil each year, including Confirmation Statements and submission of the Annual Accounts and Corporation Tax returns. Directors have a responsibility to ensure that these requirements are met and can be held personally liable if the company does not meet its legal obligations. Often this obligations require 3rd party professionals to fulfil, for example the Annual Accounts and Corporation Tax returns, meaning that there is a cost implication to running a limited company and this will increase as the firm gets bigger and other costs will also likely come on board with growth, such as VAT returns.

Despite this many people find the benefits in both security and financially, outweigh the drawbacks and this is often a recommended structure for a great deal of companies.

Partnerships

Partnerships are another popular business type and are where two or more people work together to carry out the actions of a business.

Structurally they are similar to a Sole Trader, except that the owners each have a stake in the ownership of the company and the profits are split according to the share of the business each partner holds. It is also important to be aware that any debts incurred by one partner are owed by all partners, which is known as ‘joint or several’ liability.

Despite the potential risks, the benefits of a Partnership are similar to that of a Sole Trader, i.e. very limited regulatory work, although there is slightly more work than for a Sole Trader, as a Partnership Statement is required in addition to your Personal Tax Return. They are quick and easy to set up, you just want to ensure your partnership agreement sets out the terms clearly from the outset.

Limited Liability Partnership (LLP)

Outwardly very similar to a traditional Partnership, LLP’s are a relatively new company type. Structurally, however, they are closer in structure to a Limited Liability Company, being treated as a legal entity in and of themselves.

An LLP requires at least 2 Partners and some or all of the Partners need to have limited liabilities, which in practice means that they are only responsible for their own potential negligence or misconduct, rather than being responsible for the whole organisation (as with a traditional Partnership).

As with a Limited Liability Company, LLP’s are required to submit an annual return and accounts so compliance costs are higher than a standard Partnership, however, the protections afforded often make this worthwhile.

In summary

What structure works best for you will depend on your circumstances and the above is only a summary. As always, if you are unsure, we always suggest you get advice based on your situation and we, of course, are also here to help.

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