Business structures: sole trader, limited company, partnership or LLP?
Article written for Bytestart readers by Stephan Weber of Sykes Anderson LLP
There is not one business structure that suits every business and each structure has advantages and disadvantages. You should not make a decision lightly about the business medium that you will use and seeking advice from a solicitor and an accountant at this early stage might safe you money in the long term.
This guide will provide an overview of the different business structures that are available to small businesses.
Sole Trader
The simplest way to start up a business is as a sole trader.
You will have complete control over your business and all profits after tax will go to you. On the other hand this business structure comes without a security net. You will be personal accountable for any liabilities that your business incurs, i.e. any business debts will be your personal debts. This means that you could lose your house if your business fails.
As far as administrative burdens go you will simply have to file an annual self-assessment tax return and keep records of your business income and expenses.
The only way to raise money as a sole trader is by obtaining loans from banks or other lenders.
Partnership
A partnership allows two or more people to join forces and set up a business together.
The partners will share the risks and liabilities, the management and also the profits of the business.
Again, as a partner you will be personally liable for any debt of the partnership so you stand to lose not only what you have invested in the business but also any other property that you own.
You should only form a partnership with people that you trust, you will be able to work with and who will add something to your business venture. If you look for a partner merely as a source of finance, you might be better off with paying interest to a bank.
Although statutory provisions can provide you with a basic set of internal rules it is strongly recommend that you sign a partnership agreement before you start business. Some of the statutory default rules are frankly inadequate or impractical.
Limited Liability Company
Using a limited liability company as your business medium will allow you to keep your business distinct from your personal affairs and a corporate structure might appear more professional to customers and suppliers. However, running a company will also increase your administrative burdens as you will, for example, have to file your personal tax returns as well as those for the company.
There are a number of mandatory statutory provisions that you will have to comply with. This, for example, prevents you from adopting a more flexible decision-making process as in a partnership and it also requires you to file certain company decision and the company accounts at Companies House.
The company is a separate legal entity and only the company itself is liable for its debts. As a shareholder in the company you can only lose the money that you have invested.
At first sight limited liability will seem like an enormous advantage. However, this perception can be illusory if you are required to give personal guarantees, for example as security for a loan or for a lease of business premises.
Generally, the running costs of a company can be significantly more than those of a partnership or a sole trader but the initial costs of setting up a company are now often similar or even less than those of setting up a partnership as shelf-companies and company precedents are widely available.
Limited Liability Partnership
A limited liability partnership is a cross between a partnership and a limited liability company but, unfortunately, falls short of simply cherry picking all the advantages of each structure.
Like a company a LLP has a distinct legal personality and the liability of individual partners is limited. However, limited liability comes with similar filing and disclosure requirements as for companies.
A LLP retains the flexibility of a partnership as opposed to the more rigid structure of a company but while the regime for companies is relatively clear and well-understood, LLPs are still a relatively recent medium and unforeseen problems might be thrown up as it matures.
As with partnerships the members of the LLP are taxed direct.
Conclusion
It is not possible to lay down any hard and fast rule as to which business medium is the most beneficial as there are too many variables.
Sometimes the desirability of limited liability will make a company structure the only real possibility. If that is not required other factors might be more significant.
Although this will seem typical coming from a lawyer the only sound advice is that each case must be determined according to its particular circumstances.
Posted October 11, 2007
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