Organisation & structuring

Prospective entrepreneurs should carefully choose the legal structure and organisation of their future business.

Why is it important to consider different legal structures?

Legal structure affects the following aspects of any UK business:

The tax and National insurance contributions
The way the business can raise funds and take loans
The way management decisions are made about the business
Financial liability if the business has any problems
Which authority must be informed when the business starts operating.

Types of Legal Structures

Sole trader

This is the simplest way to set up and run a business: ownership and control of the business rests with a single individual. Regulation for the sole trader is minimal: there is no requirement for a formal constitution and registration with the Companies House. However, being a sole trader is regarded to be risky, as the individual is not separate from the business and has sole unlimited personal liability for the business. This legal form can be suitable for small businesses.

Partnerships

There are three types of partnerships:

Ordinary partnerships

A Partnership is a relatively simple way for two or more legal persons to set up and run a business together with a view to profit. A partnership can arise, without any formal agreement, when people carry on a business in common, but typically there is an agreement to trade as a partnership. Partners will usually draw up a legally binding partnership agreement, setting out such matters as the amount of capital contributed by each partner and the way in which they will share the profits (and losses) of the business. Again the Partnership has no separate legal personality. Partners share the risks, costs and responsibilities of being in business.

Limited Partnerships.

A limited partnership has two sorts of partners: general partners and limited partners. The form is similar to a Partnership, with the main differences being that the limited partners may not be involved in the management of the business and their liability is limited to the amount that they have invested in the partnership.

Limited Liability Partnerships (LLPs).

LLPs must have at least two designated members – the law places extra responsibilities on them. LLPs must register with Companies House, send Companies House an annual return and file accounts with Companies House.

Private company

A private company is a firm held under private ownership. Private companies may issue stock and have shareholders, but do not trade on public exchanges. A private limited company may be limited by shares or by guarantee.

A private company:

Must be registered at Companies House
Does not have to appoint a company secretary but if one is appointed, this must be notified to Companies House.
Must file its accounts annually with Companies House. The accounts must be audited unless the company is exempt.
Must send an annual return to Companies House.

Public Limited Companies (PLCs)

PLC is a company that has shares that can be purchased by the public and which has allotted share capital with a nominal value of at least £50,000.

PLCs must:

Have at least two shareholders
Have issued shared to the public to a value of at least £50,000
Be registered (incorporated at Companies House
Have at least two directors – at least one must be an individual. Each director who is individual must be at least 16 years of age
Have a qualified company secretary

Can the legal structure of the business be changed?

Yes, as the business grows and changes. it may become appropriate to change its legal structure. It is strongly advised that you seek professional advice before changing the business structure as you will have to meet certain legal obligations.

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