Types of Business Structures in the UK

The type of business structure refers to the legal structure the business chooses. It is a vital part of setting up a business, which entrepreneurs must consider extremely carefully. You can choose to run your business in several ways, for example, as a sole trader, in a partnership, or even as a private limited company. 

The option you choose will influence the business throughout its existence, including the owner's financial liability, how the business pays taxes, and the way management decisions about the business are made. It can also affect the amount of administrative work and the ability to raise funds. Let’s explore which types of businesses there are and how they differ from each other.

Types of UK Business Structures

There are four main types of business structures in the UK. Each of them has different tax and liability implications for owners and shareholders:

1. Sole trader
2. Partnership and limited liability partnership (LLP)
3. Limited Company: Public Limited Company (PLC) and Private Limited Company (LTD)
4. Guarantee Company (Non-profit)

Sole Trader

A sole trader is usually referred to as self-employed or a sole proprietor. This term describes a business owned and controlled by one person. In 2022, there are approximately 4.21 million self-employed workers in the UK. It is the most common and easy way to start a business, as it's very easy to set up. This type of ownership provides a person with absolute freedom when it comes to decision-making.

A sole trader must register a business with HMRC. Thus, he or she has the right to keep profits as income but is required to pay taxes, including National Insurance. It must be made by filling out a Self-Assessment Tax Return. 

Legally there is no separate business entity, meaning there is no distinction between the business owner's personal and professional assets and liabilities. Hence, a sole trader is personally liable for the business's debts and has to pay for the potential losses.

Partnership

Partnerships are businesses that are similar to sole traders but legally owned by two or more people. A partnership agreement is a key legal document that is agreed upon and signed by all partners. It determines the division of profits and losses that the business undertakes. 

In the partnership, the business owners have unlimited liability, and all liabilities and debts are shared equally between the business partners depending on their share in the business. What’s more, each partner is responsible for the other partner’s irresponsibility or misconduct.

The partnership has the benefit of greater borrowing capacity as there are more people involved in raising investment capital, so it may have lower startup costs.

Limited Liability Partnership

Limited liability partnership (LLP) is a subtype of partnership, and the member’s liability is limited to the amount of money they invested in the business. The LLP can have two or more members, both individuals, and companies. 

The LLP must be registered at the Companies House and with the HM Revenue and Customs. All participants must annually submit a personal Self-Assessment Tax Return and pay income tax on their share of the partnership's profits and National Insurance.

Limited Company

A limited company is a separate legal entity. As such, it's responsible in its own right for everything it does. The company's finances are separate from the personal finances of the owners. This guarantees more protection for the owners and other shareholders. As well as financial security, there are tax and National Insurance advantages. For example, up to a certain value, a company's profits are tax-free. But there are also some disadvantages, such as more complex and restrictive rules regarding accounts and bookkeeping for a limited company.

There are two types of Limited Companies: Private and Public (LTD and PLC). Let’s take a closer look at them.

Private Limited Company (LTD)

A private limited company (LTD) is a company usually owned by shareholders, who are typically the directors of the business. A private limited company is an incorporated business, which means that the business is classed as a company and has a separate legal entity. Therefore, the owners are not personally liable and won't lose their assets.

The ownership of a limited company is divided up into parts called shares. Its shares cannot be offered to the general public. As a benefit, an LTD is more tax-efficient than, for instance, a sole trader or partnership business model. At the same time, the company has greater administrative costs and increased legal requirements, and it has to publicly disclose key information, which not all owners would want to share willingly.

Public Limited Company (PLC) 

A public limited company is owned by shareholders, just like a private limited company. It has a crucial advantage of limited liability and is often referred to as a PLC. They only make up 4-5% of all limited companies in the UK. 

PLCs have more legal requirements and paperwork, but as an advantage, they have an option to offer shares to the public through the stock exchange. It is a great way of generating additional capital for the business since PLCs have the opportunity to receive investment through the sale of shares. As a limitation, before a company can be registered as a PLC, it is necessary to issue shares worth at least £50,000.

Read More About Problems Faced by Small and Medium-Sized UK Businesses.

Guarantee Company (Non-profit)

Companies with a limited guarantee are, simply put, non-profit companies. Any profit received is reinvested in the company and used to accomplish the company's goals. Non-profit companies are, as a rule, charitable organisations working for public purposes or in support of a common mission. Limited by guarantee companies are legally required to make their information public.

Whatever form of company registration you choose, Payrow is ready to help you build a business and simplify the processes of money and document management. Currently, Payrow supports limited companies and LLPs, and soon our service will be available to every type. 

Start your business with Payrow!

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