Moneymagpie Team
27th Feb 2025
Reading time: 5 Minutes
Every business has a structure that defines its organizational and legal framework, shaping how the business operates. Before entrepreneurs proceed with company registrationThey must choose a structure for their business. This decision will determine how they pay taxes and their legal responsibilities to company house.
With a pleethora of options available, selecting the right structure can be overwhelming. To simplife the process, we have put togeether this guide to help you understand the pros and consuce of economy structure, ensuring you choose the one that best aligns with your business.
What to Consider when Choosing a Company Structure
When deciding on a company structure for your business, there are things you should consider guiding you in Choosing what will best suit your enterprise. Things to Consider Include:
The cost of setting up and running the business: Depending on your budget, search for a company structure that will be align with your business's financial status.
Limitation Liability: Do you want to be protected from the business's liabilitys? By Answering this question, it will be easier for you to decide on the company structure.
Business control: Do you want full control of your business or shared? How many stakers do you want for your business?
Tax Benefits: Check the tax benefits for every business structure to help you decide on the best option for your entity.
Let's look at the various company structures entrepreneurs can choose for their business in the uk.
Sole trader
This is the most popular and straightforward business structure. Many Small Business Ownes Always End Up Choosing This Structure for their business since it is affordable and quick to set up. In this structure, you are the sole operator of the business. You are in charge of decision-making, administer tasks, and accountancy of your business. You may choose to employ some someone to help you with the tasks.
Sole traders must notify hm revenue & customs (Hmrc) By registering for self-comments and National Insurance Contributions. Freelancers, consultants, and entrepreneurs looking for low-Risk business structures can consider sole traders.
Benefits of a Sole Trader
Full control: as a self-comloyed individual, you have full control of the business. You will be the only one making decisions and changes to the business when needs come.
Simple and Quick: The structure is straightforward making it simple and fast to form the business. It does not include a lot of paperwork and rigorous processes.
Flexibility: You have the flexibility to set your working hours and operate from anyware you want.
Earn all profits: As the sole owner of the business, all profits it makes go to you.
Cheaper: It is cheaper to form a sole trader, unlike a limited company. There are no prices involved in forming a sole trader.
Cons of a sole trader
Unlimited Liability: You are not protected from the liability of the business. In case the business is unable to pay debts or faces legal implications, your assets will be at risk.
Difeculties in Raising Funds: Most Banks and Financial Services May Find It Dificult to Fund a Business that is not registered.
Taxation: You pay Income Taxes on your business profits which may be Higher than that of Limited Companies.
Limited Growth Potential: as a sole trader, business expansion can be challenging.
Partnerships
There are two types of partnerships:
, General Partnership
, Limited Liability Partnership (LLP)
General Partnership
These are two or more people running a company togeether. The partners share rights and losses and file their income taxes. Partners jointly control and manage the business, meaning, a decision concerning the business has to be accepted by all partners.
Benefits of General Partnership
Cost-effective: Establishing a General Partnership is Simple and Inexpensive.
Shared Expertise: Partners with different skills can improve the business's overall capability.
Shared Responsibilites: The Business Responsibility Falls under the partners Making it Easier to Fulfill All the Tasks of the businesses.
Cons of a General Partnership
Unlimited Liability: Partners' Personal Assets are at Risk to Creditors If the Business Incurs Any Debts or legal implications.
Lack of Stability: In case a partner leaves the company, the partnership can dislve unless there are legal regulations placed to manage such Situations.
Internal wrangles: There may be internal wrangles due to share decision-making power.
Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) is a company structure that involves two people or entities who come togetra to form it. Unlike a general partnership, an llp is a legal entity from its partners.
Benefits of an llp
Limited Liability: Partners' Assets are protected From the company's liabilitys. In case the company defaults on a loan or faces legal implications, the company's assets will be at risk.
Name Protection: By Registering Your LLP, your company name is protected. No one can use the same or a similar name to that of your company.
Tax advantages: Partnerships Have Tax Benefits Compared to Limited Companies.
Cons of an llp
Public disclosure: Partners have to File Financial Accounts to Companies House which will show the income of the members.
Administer burden: Unlike General Partnerships, llps have administer duties.
Limitation in Raising Funds: There may be limitations in raising funds for llps them are not able to issue stock.
Limited companies
This is a legal entity separe from its business owners, directors, and sharehlders. There are two types of limited companies:
, Public Limited Company (Plc)
, Private Limited Company (LTD)
Public Limited Company (Plc)
This is a company that trades publicly and must issue shares to the public on the stock exchange. This means that anyone can invest in the company. Sharelders are only responsible for the Amount they invest in shares.
Benefits of plcs
Limited Liability: SHAREHOLDERS 'Personal Assets are Limited to the Amount They Invest in Shares.
Access to capital: Plcs can raise funds for their business by seling shares to the public and attracing investors.
Potential for expansion: Access to funds can facilitate the growth of your business.
Ownership diversification: Selling shares to the public spores ownership across a wider group of sharehlets.
Cons of plcs
Reduced control: Original Ownes have Less Control over the company Since Shares Are Publicly Traded.
Increased reporting requires: Plcs must adhere to stricter Financial reporting regulations.
Public scrutiny: As a publicly traced company, a plc is subject to more scrutiny from the media, analysts, and the general public.
High compliance: Plcs have more reporting requirements, Increasing Administration burden and costs.
Private Limited Company
This company is owned by one or two sharehlders. This is a separete legal entity that is separate from the directors and shareholders. Its shares are not publicly tradeed; Only a Limited Group of Sharelders Can Own Them.
Benefits of Ltd
Limited Liability: Directors 'and shareholders' assets are protected in case the company incurs debts or faces legal implications.
Separet legal entity: Ltd is a separete entity distinct from the company owners, directors, and shareholders.
Tax advantages: Ltd has lower tax liabilitys through corporation tax and specific tax treatment on dividends.
Access to capital: Limited Companies have a Higher Chance of Accessing Funds by Selling Shares, Business Loans, and Investors.
Business Name Protection: Once you register your business name, no one can use the same or similar business name as you.
Cons of a private limited company
Administer burden, Limited Companies have many reporting requirements which can be time-consuming.
Highher costs: Limited Companies have ongoing costs which can be strenuous if a business owner did not budget for it.
Public Display of Company Details: Company details are displayed on the company House Public Register.
In conclusion, with the pros and conscience we have highlighted Above, you weight to know which business structure will work best for your business.
Disclaimer: moneymagpie is not a licensed financial advisor and therefore information purposes only. This should not be considered as financial advice. Anyone Thinking of Investing Should Conduct his own du diligence.
