CHOOSING THE RIGHT LEGAL STRUCTURE FOR YOUR NEW BUSINESS

Having helped over 200 businesses with their legal matters to date, we have put together a jargon buster and FAQ guide for those looking for guidance when choosing the right structure for their business.

WHAT LEGAL FORM COULD MY BUSINESS TAKE?

In basic terms, if you are the sole owner, you can operate as a sole trader or you can form a limited company. If your business has more than one owner, you can operate as a limited company, a partnership or a limited liability partnership.

The most suitable form for your business will depend on a number of factors: what kind of business you have, how many people are involved, how you intend to structure the internal management of your business, tax liabilities, profit distribution, and whether you intend to remove profits and reinvest them back into the business.

If you are at the stage of moving your business from idea stage to starting up, you should seriously consider getting expert legal and financial advice. The best time to get advice from your lawyer and accountant is before you set up and register the business, before you open a bank account, and before you start taking on customers.

WHAT IS A SOLE TRADER?

If you operate as a sole trader, you run your own business as an individual and are self-employed.

A sole trader is the simplest business ownership structure as the individual does not need to register the company with a formal constitution or submit any documents to Companies House for incorporation.

Once you have paid the applicable income tax and NI, you keep all your business’s profits. You will need to keep records of your business’s sales and expenses, Register for Self-Assessment and file a tax return every year.

However, you should be aware that as a sole trader you are personally responsible for any losses or debts of your business. There is no limited liability. So, if your business fails it can mean real personal and financial difficulties for you as the sole owner.

WHAT IS A LIMITED COMPANY?

A limited company is a legally separate entity from the people who own it. The owners of a limited company are protected by limited liability and operating as a limited company can offer more operational flexibility, however there can be more of an administrative burden and cost to operating a limited company compared to a sole trader or partnership.

Many businesses start off as sole traders or as partnerships, but form a company for limited liability and flexibility as their business grows.

For businesses that make a profit, a limited company is generally a company ‘limited by shares’ as opposed to “not for profit” companies which are generally ‘limited by guarantee’.

The company will have separate finances from the personal finances of its owners and can keep any profits it makes after paying tax.

For a limited company you will need to register with Companies House. Further details on setting up and registering a limited company can be found at

WHAT IS A PARTNERSHIP?

In a partnership, you and your partner (or partners) personally share responsibility for your business.

Partners share the business’s profits, and each partner pays tax on their share.

However, you should be aware that each partner in a partnership is personally liable for any losses and any debts of the partnership. There is no limited liability.

If the business risks are low then this can be an effective way to start off a business and ensure that partners are committed to the business. However, if the business fails it can mean real personal and financial difficulties for the individual partners involved.

There are some businesses required by law or the rules of a professional body or association to be in the form of a partnership.

A partner in a partnership does not have to be an actual person. For example, a limited company counts as a ‘legal person’ and can also be a partner.

When you set up a partnership you need to register for Self-Assessment with HM Revenue and Customs (HMRC) and choose a ‘nominated partner’ who will be responsible for managing the partnership’s tax returns and keeping business records. The other partners need to register separately and send their own tax returns as individuals.

WHAT IS A LIMITED LIABILITY PARTNERSHIP?

A Limited Liability Partnership (LLP) is an alternative legal structure generally used for businesses that normally operate as a traditional partnership, such as solicitors, accountancy firms and dental practices.

An LLP has the same characteristics as a normal partnership structure in terms of tax liability, internal management and the distribution of profits, but it provides reduced financial liability, or ‘limited liability’, to each partner.

WHICH LEGAL FORM IS MOST TAX EFFECTIVE?

Profits and income taken from the business are treated differently depending on whether you are a company, a partnership or a sole trader. The most tax effective business form will depend on how profitable your business is, and how you use those profits — will you be reinvesting profits back into the business or taking them for your personal use?

WHAT NAME CAN I USE FOR MY BUSINESS?

Sole trader and Partnerships:

You can trade under your own name(s), or you can choose another name for your business. The name cannot include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’.

The name cannot be offensive, in breach of an existing trade mark, or suggest an accreditation, approval or endorsement by central or local government.

You can check if a trademark is already in use by using the Intellectual Property Office online search facility.

You do not need to register the business name, however if you want to protect the name and stop other people from using it then you should seek legal advice on registering the name as a trademark.

You must include all the partners’ names and the business name (if you have one) on official paperwork, for example invoices and letters.

Limited companies:

You must choose a registered name for your business if you’re setting up a limited company. Your name must usually end in either ‘Limited’ or ‘Ltd’ (or the Welsh equivalents). You can also use a “trading as…” or business name, i.e., use a different name to your registered name, however it should not include ‘limited’, ‘Ltd’, ‘limited liability partnership, ‘LLP’, ‘public limited company’ or ‘plc’.

Your company name(s) cannot be offensive, the same as another company’s name or an existing trade mark or suggest an accreditation, approval or endorsement by central or local government. If you do register a name that is too similar to another company’s you may have to change it if someone makes a complaint.

You can check if a company name is already registered using the Companies House WebCheck service and you can check if a trademark is already in use by using the Intellectual Property Office online search facility.

If you want to protect your company name(s) and stop people from using it then you should seek legal advice on registering the name as a trademark.

You must include your company name(s) on all company documents, publicity and letters.

DO I NEED TO REGISTER FOR TAX?

Sole traders need to register for Self-Assessment with HMRC and file a tax return every year.

Partnerships need to register for Self-Assessment with HMRC and choose a ‘nominated partner’ who will be responsible for managing the partnership’s tax returns and keeping business records. The other partners need to register separately and send their own tax returns as individuals.

Most companies register for Corporation Tax and PAYE as an employer at the same time as registering the company with Companies House. Limited companies need to register for Corporation Tax within 3 months of carrying out business via the company.

You will need to register for PAYE as an employer with HMRC when you start employing staff. You must register even if you’re only employing yourself, for example as the only director of a limited company.

You must register for VAT if your taxable turnover is over £85,000 or you know that it will be. Your VAT taxable turnover is the total of everything sold that is not VAT exempt. You can also choose to register for VAT if, for example, you sell to other VAT-registered businesses and want to reclaim the VAT.

HOW DO I SET UP A LIMITED COMPANY?

Companies House is the organisation responsible for all limited company registration in the UK. Their website provides detailed information and guidance on setting up and operating a limited company.

You can set up and register a limited company by yourself. The whole process can be done online through the Companies House website, or by completing Form IN01 manually. Alternatively, you can use a third party, like your accountant, to process the application on your behalf.

The following documents must be completed and returned to Companies House in order to complete the registration process:

• Memorandum of Association — confirms the intention of initial subscribers to form a limited company in the first place, with the following wording: “Each subscriber to this memorandum of association wishes to form a company under the Companies Act 2006 and agrees to become a member of the company and to take at least one share.” This is followed by a list of all subscribers. If you are registering online there is a checkbox to confirm that each subscriber has authenticated the memorandum of association. You do not have to submit a physical document.
• Form 10 — director’s names, addresses and registered limited company address. To form a company, you must have at least one director. You can choose to appoint a company secretary, but it is no longer a requirement. You will also need to decide how you will apportion the shareholdings in your new company and if there will be different classes of shares.
• Form 12 — states the limited company complies with terms and conditions of the Companies Act
• Articles of Association — govern all aspects of how the company will be run, including directors’ powers, decision making by shareholders, voting rights, and how dividends are distributed. ‘Model articles’ are available which are perfectly adequate for the majority of businesses.

You must have a registered address where official mail can be sent. If you’re setting up a company in England or Wales, then the registered address must be within one of these countries. The same applies for Welsh, Scottish or Northern Ireland-based companies — the registered office address must be in the corresponding territory.

When registering your company, you will also have to select the relevant Standard Industry Classification (SIC) Code is a unique code to identify what a business does. You can check for the relevant code(s) on the Companies House website.

All companies must now keep a PSC Register recording all ‘People of Significant Control’ (people who own 25% or more of the shares in a limited company, or have 25% or more of the voting rights). If this information changes it can be updated via the Confirmation Statement which all companies are required to submit to Companies House each year, to keep the registrar up-to-date.