Choosing the Right Business Structure: Options, Pros, and Cons

Taking the next step in your career by looking into registering your business is an exciting venture. However, for many startups this often poses two confusing questions: (1) which business structure should you choose moving forward; and (2) if you choose a company, how do you go about incorporating it? 

This article will cover the business structures available in the UK. Once you have carefully considered all options, the second article will offer guidance as to how you go about incorporating your company if that is what you have decided on.

Business Structure	Who is it for?	Advantages	Disadvantages	Requirements
Sole trader	Individual running your own business.	Flexibility to work on your own terms.  All profits are your own, with no upper limit. Easy to set up and few legal responsibilities. No registration fees.	You and your business are one entity. You are liable for any and all losses, debts, claims etc. that your business encounters.   Unlimited personal risk.  Subject to tax (see requirements section).	Must inform HMRC of sole trader business status and fill out self-assessment tax returns.  Sole traders are also obliged to pay National Insurance Contributions (NIC).  Must register for VAT if taxable turnover is above VAT threshold (£85,000 for sole traders from 1st April 2022, subject to change after 31st March 2024).
Ordinary partnership	Business with two or more people wanting to benefit from a similar structure as a sole trader.	Simple and cheap to set up.  No formal contract required  as the Partnership Act  1890 provides the default agreement.  No registration or formalities are required. Whether a general partnership exists is a matter of fact.	Not a separate legal personality, so partnership cannot hold assets in its name.  Partners are liable for all debts, wrongful acts, obligations, etc.	Minimum of two partners. Each partner must register as self-employed and complete individual tax requirements as per the sole trader.  National Insurance Contributions (NIC) payable.
Limited Partnership (limited by shares)	Similar to a general partnership but  has two categories of partners (general partner and limited partner)*. Appointed directors manage the company. *General partner is responsible for managing the business and has unlimited liability; Limited partner invests capital in the LP and has limited liability.	Compared to companies they are governed less lightly in terms of statute, meaning greater flexibility. Registration is relatively cheap (£20 or £100 for same day registration)  and the LP comes into existence on the same day as registration.	Not a separate legal personality so partnership cannot hold assets in its name.  Limited liability only for limited partners and not for general partners. Liability is limited to the amount contributed. Company has to pay income tax.	Minimum of two persons required to form a partnership (one limited partner and one general partner).  Must be registered at Companies House (Form LP5). Must register for corporation tax.
Limited Liability Partnerships (LLPs)	Entity with separate legal personality from its members.  All members are entitled to share profits and capital equally.  For clarification, “members” refers to:  - persons who are included in the incorporation document.	Unlimited capacity, meaning it can do anything a legal person can do. Since it is a separate legal personality it can hold assets in its name.  Members have limited liability, so do not need to meet LLP’s liabilities unless special circumstances apply. Flexible business structure where members are free to agree on how to share profits, how members retire, etc.	Although a separate legal entity, members are treated as partners for tax purposes (liable for tax on their share of the LLP’s income or gains). Several fees involved in registration of LLP. Members cannot be employees of the LLP (see Clyde & Co case in sources section). Any changes in memberships or their details requires filling out the relevant forms and notifying the Registrar. This must be done within 14 days. Forms include: - LLAP01 - appointment of individual member;  - LLTM01 - cessation of membership;  - LLCH01 - change of member’s details.  Accounts of LLPs are public.	Must be incorporated by registration at the Companies House (Form LLIN01). Must be incorporated with a name ending with llp/LLP. Must have two appointed members at all times, with no maximum member limited. Members must agree and act in accordance with the legal obligations under the LLPA 2000 (Limited Liability Partnership Act 2000).

Click here for all Companies House fees.

Click here for more info on setting up as a sole trader.

Click here for more info on setting up a partnership.

Click here for more info on setting up a limited partnership.

Click here for more info on setting up a limited liability partnership (LLP).

The most appropriate business structure depends on a variety of factors, including the size of your business, capital available, liability you may incur, etc. The structures above were organised in order of simplest in terms of setting up and getting started, to complicated and more apt for larger organisations. Depending on what business structure you do choose, it is always important to consult a legal professional for bespoke advice on the specifics and context surrounding your business.

Authors: Niccolo Guastella, Tanisha Shah and Ilona Munn -

Authors: Niccolo Guastella, Tanisha Shah and Ilona Munn -

In partnership with:

DISCLAIMER

This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.

Sources

Practical law corporate , 'General partnerships, LLPs and limited partnerships: comparison of key features' (Thomson Reuters, Practical Law) <https://uk.practicallaw.thomsonreuters.com/w-003-6357?originationContext=document&transitionType=DocumentItem&contextData=(sc.Default)&ppcid=f1ba4973f92c4a4588aa6303f81a3e0e&comp=pluk&navId=D227F011F41A00768FE2632DDD1F2A16&firstPage=true> accessed 11 May 2022

Practical law corporate , 'Limited liability partnerships (LLP): overview' (Thomson Reuters, Practical Law, ff) <https://uk.practicallaw.thomsonreuters.com/Document/I3351a73be8da11e398db8b09b4f043e0/View/FullText.html?navigationPath=Search%2Fv1%2Fresults%2Fnavigation%2Fi0ad6ad3c0000018098e2b2e2f0853837%3Fppcid%3D78cb34ee48ca471d93e4a443c7f5c128%26Nav%3DKNOWHOW_UK%26fragmentIdentifier%3DI3351a73be8da11e398db8b09b4f043e0%26parentRank%3D0%26startIndex%3D1%26contextData%3D%2528sc.Search%2529%26transitionType%3DSearchItem&listSource=Search&listPageSource=b66e39cdd2e784f969bda0210999fe21&list=KNOWHOW_UK&rank=1&sessionScopeId=20fb298c634499f30f2c524cebf83b854cd9779a6fd12748e7057eae312fb66b&ppcid=78cb34ee48ca471d93e4a443c7f5c128&originationContext=Search%20Result&transitionType=SearchItem&contextData=(sc.Search)&comp=pluk&navId=315F04430D95BA9473DAE3B293E07020 > accessed 11 May 2022

Charles Wild and Stuart Weinstein, Smith and Keenan's Company Law, 18th Edition (18th edn, Pearson 2019) 1-42

Clyde & Co LLP and another (Respondents) v Bates van Winkelhof (Appellant) - court held that an individual cannot simultaneously be a member and an employee under any circumstances.