Choosing a business structure – where do I begin?

Whether you're starting a new business or thinking of restructuring your current business, the structure you choose is significant. You will want to consider various factors including the type of business you run, what you aim to achieve and how it will be funded. In this article, we look at three of the most common structures to provide a helpful starting point in making the decision.

Sole trader

According to government statistics, sole traders made up around 56% of all UK businesses last year making it the most common type of business structure.

Being a sole trader can save you the time and costs of setting up and running an incorporated business and can be ideal for starting out. You are in control of the business, you keep all the profits (subject to tax) and, unlike other structures, your business does not need to be registered nor publish information at Companies House.

A major drawback, however, is that you will be personally liable for all your business' debts and losses. This is because the business has no separate legal personality, and you personally own all of its assets. If you wish to avoid this liability, then you may want to consider one of the other options.

Summary:

• Quick and simple to set up with low running costs and less ongoing administration
• Information about your business is not available on a public register (Companies House).
• You own the assets of the business
• You are personally liable for the business' liabilities and obligations

Private company limited by shares

A company limited by shares is another common type of business structure and has various benefits for start-ups.

Unlike a sole trader, a company has legal personality meaning it is a separate entity distinct from its directors and shareholders. In a private company limited by shares, this means the shareholders are not personally liable for any of the company's debts. This is provided they have not granted any personal guarantee in respect of the company's obligations e.g. to a bank that has lent money to the company. A company can also be limited by guarantee however, this is a more common structure in the charities and not-for-profit sector.

Company directors run the company on behalf of the shareholders but it is possible for you to be both. The directors have duties, set out in the Companies Act 2006 and in common law, which are owed to the company.

Companies can issue new shares to raise capital from investors giving the company money to invest in growth and the investor a share in the company and its profits. This is a key reason growing businesses might decide to make the change from a sole trader to a limited company.

Setting up a company comes with an initial fee to register your company at Companies House and an ongoing obligation to file information there.

Filing your annual accounts, financial reports, up-to-date records of directors and shareholders and Persons with Significant Control of the company (among other filings) can be a significant administrative burden, particularly for a business that is just starting out. It also means that all of that information is available on a public register.

Summary:

• Companies are separate legal entities and shareholders are generally not personally liable for the company's debts
• You can raise capital for your business by issuing and selling shares
• There are set up costs and more administrative running costs
• Your annual accounts and other filings are publicly accessible on Companies House

General Partnership

In a partnership, you and at least one other person (or company) run the business "in common with a view to profit". Whereas a sole trader only has one owner, a partnership structure allows the business to have multiple owners. Generally speaking, there are no formalities for setting up a general partnership in Scotland, however, the partnership will often be formed by a partnership agreement. The agreement sets out the ownership of the partnership, the respective partners' liabilities, how the profits are split and what happens if a partner wants to leave.

Although there are no formal set up requirements, partnerships are governed by the Partnership Act 1890. This provides certain default rules which can be altered by agreement between the partners. Other than this, Scottish general partnerships are not regulated and can be a good flexible option for starting up a business.

Unlike in England, general partnerships in Scotland have separate legal personality. However, this does not mean they benefit from limited liability – in both Scotland and England, each partner has unlimited liability to creditors for all the partnership debts.

Summary

• General partnerships are flexible and easy to set up
• Like sole traders, partnerships do not need to make regular filings to Companies House
• In Scotland, they also benefit from separate legal personality
• You and your partner(s) will still have unlimited liability for all of the partnership's debts

If you have any further questions or are interested in setting up a business, please get in touch with a member of our corporate team.