The number of new small businesses has jumped in the last few months as many people have used their lockdown to start a new venture. Research indicates that, while partly the result of necessity, a number of people have used the time to think about the direction of their life or to kickstart a business that they always wanted to do but never had the time. Whatever the reasons behind this, figures from Companies House indicates that the number of new companies incorporated in 2020 was more than 2000 more that in 2019.
If you have or are thinking about starting a new business, the structure that you use is key.
What type of structure should I use?
In the UK, we have four main different types of structure for businesses. Generally speaking, they are all available to all businesses, so the choice is yours.
The structures we have are:
- Sole trader
- Limited liability partnership
- Limited company
I’m only a small business – I don’t need anything complicated, do I?
What type of structure is right for you will depend on your priorities and business needs. Each comes with their own benefits and downsides. Let’s take them one at a time:
The Sole Trader. This is the most common type of micro business structure. It is one person running a business. There is no legislation dictating how you run the business and no need to disclose your accounts publically (you will of course need to tell HMRC, so you can pay the correct tax). However, you are personally liable for all the debts of the business, so your personal finances and personal assets may be at risk.
The Partnership. This is like a sole trader, but two people owning the business, rather than one. Again, both of you are personally liable for all the debts of the business.
The Limited Liability Partnership (LLP). This is a hybrid of a partnership and a limited company. Again, you need at least two people to be partners. However, with this type of structure, you gain the benefit of limited liability (see below for what this means), but the payoff is that you need to publically disclose your accounts and comply with the rules set out by the Registrar of Companies (Companies House).
The Limited Company. The most well known type of business structure and the one most people go with. Being a limited company carries with it an implication that your business is a permanent entity, rather than something in its early stages. The main benefit of a limited company is limited liability. This means that the company exists a separate legal person from both its directors and shareholders. They are not responsible for the debts of the business (unless they take responsibility for them by eg giving a personal guarantee). Again, as with the LLP, the payoff for that benefit is that you have to comply with the Companies Act 2006 and information about the company, its owners and its financial position will be in the public domain.
Does it really matter that much?
Getting the structure of your business right will make life easier in the future, allowing it to grow in the right way. Different types of structure also allow for different types of funding, so if you are planning raising finance, you might need to think through the implications now, ready for this.
For tailored advice or guidance on your business please visit our services to businesses page