Changing Your Business Structure: Methods and Implications
As your business progresses, its corporate structure might need to be updated. These changes generally occur with the aim of expanding a business, and some reasons behind them can be limiting personal liability, changing ownership, raising capital, mitigating exposure to risk or incentivising employees. You might find yourself in a position where a structure that suited your business initially may no longer be fit for purpose. Therefore, a regular review of the business's structure is necessary to ensure it meets the business's targets and objectives.
The different types of business structures are the following:
1. Sole Trader
Considered “self-employed” where someone who runs the business on their own, which means that the business must be registered with HMRC for self-assessment as soon as it begins trading.
2. Partnership
Requires at least 2 partners. When creating a partnership, the partners must choose not only a name but also a “nominated partner” who is responsible for registering with HMRC for self-assessment as well as filing the partnership tax return. Each partner is liable for any tax arising from the partnership business individually.
3. Limited Liability Partnership
The partners’ liability is limited. There is no limit on the number of partners, but two “designated members” are required to file annual accounts. Each partner must be individually registered with HMRC as self-employed and the business itself must be registered at Companies House.
4. Limited Company
This form of business legally separates the people who run the business (the directors) from the people who own it (the shareholders). At least one person is needed to form the company and there is no maximum number of shareholders. The company must be incorporated and registered at Companies House through the IN01 form. The company must be registered for corporation tax, and once the UTR number from HMRC has been received, the Company Tax Return must be sent and corporation tax paid.
Sole Trader to Partnership
When converting from a sole trader to a partnership certain fundamental issues should be considered from the outset. These include:
Partnership agreement: there should be an agreement between the partners that deals with matters such as commencement date, duration, decision-making, retirement, expulsion… and other issues that can arise in the future.
Business assets: the ownership of assets will be decided by a clause in the partnership agreement which states which assets belong to the partnership itself and which ones belong to the partners individually. However, certain assets, such as stock-in-trade and goodwill belong to the partners jointly.
Liability: liability will not differ with the change, partners, as sole traders, are personally liable for the debts and liabilities of their business.
Registration: partnerships must be registered with Companies House and the price of it depends on whether it’s done by post (£40) or online (£12).
HMRC: HMRC must be informed if the structure of the business is being updated, and as it was mentioned before, a “nominated partner” must be assigned who will be responsible for managing the tax returns and keeping business records.
Tax: partnership must be registered for Self-Assessment and all partners must send their own tax returns individually.
Partnership to Company Structure
To update the structure of the business, the partnership must be dissolved first. If there is no provision in the partnership agreement, then it can be dissolved at any time by any partner giving notice to the others. An express notice period for doing so is typically included in the partnership agreement.
Alternatively, depending on the number of partners, the partnership can endure where at least two partners remain. Death and bankruptcy will most likely automatically dissolve the partnership, unless alternative provisions are specified in the partnership agreement.
Once the previous business has been dissolved, the new company must be registered with Companies House, which can be done online with a fee of £12 which results in the company being registered within 24 hours and being automatically registered for Corporation Tax at the same time; or by post with a fee of £40 using form IN01, using an agent or a third-party softwareThe business must register for Corporation Tax within 3 months of trading.
Some changes that the business will encounter once the company has been formed are the following:
Liability: shareholders will only be legally responsible for the debts of a company up to the value of the shares they possess in the business, meaning the value of the money they invested in the business.
Tax: the business will start paying Corporation Tax on the profits generated by the business. The current basic rate is 19%.
When updating the structure of a business, some of the entities that should be notified of this change include the Companies House, HMRC, employees, customers and clients, suppliers and vendors, banks and financial institutions, insurance company, any licensing or regulatory bodies if the business counts with any particular licence, any investors and any professional advisors such as accountants, consultants or lawyers.
Depending on the circumstances of a business and how these might change during the lifecycle of it updating a business structure can be highly beneficial for several reasons such as shielding the owners’ personal assets from business debts and liabilities, enhancing the company’s credibility and professional image, facilitating easier access to capital, or increasing the flexibility and potential for growth.
Some economic implications that are involved when updating a business might be legal and professional fees, valuation and transfer of assets, tax implications, business transfer agreements, employee considerations, and contracts and licences, which should all be considered before deciding.
Author: Irene Correro -
Author: Irene Correro -
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
‘Set up as a Sole Trader’ (GOV.UK, 9 February 2015) <https://www.gov.uk/set-up-sole-trader> accessed 16 June 2023
‘How to structure a partnership’ Inc.com <https://www.inc.com/guides/structuring-partnerships.html> accessed 16 June 2023
‘Set up a Private Limited Company’ (GOV.UK, 24 November 2014) <https://www.gov.uk/limited-company-formation> accessed 16 June 2023
Tarver E, ‘Limited Partnership: What It Is, Pros and Cons, How to Form One’ (Investopedia, 13 January 2023) <https://www.investopedia.com/terms/l/limitedpartnership.asp> accessed 16 June 2023
‘Tell HMRC about a Change to Your Business’ (GOV.UK, 26 November 2014) <https://www.gov.uk/tell-hmrc-changed-business-details/change-to-your-business> accessed 16 June 2023
