Legal structures

Putting your business on a proper footing

To put your business on a proper footing with HM Revenue & Customs (HMRC) and other authorities, you need to make sure that it has the right legal structure. It’s worth thinking carefully about which structure best suits the way that you do business, as this will affect:

• the tax and National Insurance that you pay
  
• the records and accounts that you have to keep
  
• your financial liability if the business runs into trouble
  
• the ways your business can raise money
  
• the way management decisions are made about the business

There are several structures to choose from, depending on your situation. If you are not sure which legal structure would best suit your business, it’s important to seek professional advice.

Overview of legal structures

Sole trader
The advantages of being a sole trader include independence, ease of set up and running, and the fact that all the profits go to you.

The disadvantages include a lack of support, unlimited liability and the fact that you are personally responsible for any debts run up by your business.Partnership
The advantages of being in a partnership include its ease of set up and running, and the range of skills and experience that the partners can bring to the business.
On the other hand, problems can occur when there are disagreements between partners. There is unlimited liability and, as a partner, you are personally responsible for any debts that the business runs up.

Limited liability partnership (LLP)
LLPs retain the flexibility of a partnership and your personal liability is limited. There is no restriction on the number of members, but at least two must be “designated members” - the law places extra responsibilities on them.

The formation of an LLP is more complex and costly than that of a partnership and problems can occur when there are disagreements between the members. If the number of partners is reduced, and there are fewer than two designated members, then every member is deemed to be a designated member.

Limited liability company
In a limited liability company your personal financial risk will be restricted to how much you invest in the business and any guarantees you have given in order to obtain financing.

However, you should remember that this type of company also brings a range of extra legal duties, including the maintenance of the company’s public records, e.g. for the purpose of the filing of accounts.

Franchise
The major advantage of a franchise is that it takes advantage of the success of an established business and support networks.

However, your freedom to manage the business is limited by the terms of the franchise agreement. Also franchisees often pay a share of their turnover to the franchiser, which reduces overall profits.

Social enterprises
Social enterprises are businesses that trade for a social purpose and represent a diverse and growing range of business activity across the UK.