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How To Choose A Legal Structure For Your UK Company

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When you start a business in the UK one of the first things you have to do is decide how you want to structure it. This can be quite daunting if it is you first time however the choices are relatively simple.

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Organizational Structure - strategy, levels, examples, advantages, manager, model, type, company

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Encyclopedia of Business, 2nd ed. Organizational Structure: Ob-Or

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When you start your business, you will have to decide on which type of business entity you will be: sole proprietorship, partnership, limited liability company (LLC), corporation, or nonprofit. The type of business structure you choose will depend on several factors, including the nature of the workforce within your organization, the goal of the company, and so on. Each legal structure for business entities has its advantages and disadvantages, so it's best to eliminate the ones that simply wouldn't fit with your organization before choosing.

Some of the main benefits and drawbacks of different types of business entities, or legal structures, are listed below:

Sole Proprietorship

Easy to create and maintain

Business and owner are legally the same entity

No fees associated with the creation of the business entity

Owner may deduct a net business loss from personal income taxes

Owner is personally liable for any debts, judgments or other liabilities of the business

Owner must pay personal income taxes for all net business profits

General Partnership

All owners are jointly and personally liable for any debts, judgments or other liabilities of the business

Owners must pay personal income taxes for all net business profits

Limited Partnership

Easy to attract investors as they are only liable for their total amount of their investment into the business

The limited partners enjoy limited liability for any debts, judgments or other liabilities of the business

The general partners are more free to focus their attention on the business

General partners are able to raise cash without diminishing their control of the business

Limited partners can leave the business without dissolving the limited partnership

S Corporation

More expensive to establish than a sole proprietorship or partnership

Paperwork is more complicated than the paperwork required for a LLC, but similar advantages

The ownership interest of the various owners determines their respective incomes from the profits of the business

Some benefits are only given to owners that have more than 2% of the business' shares

Professional Corporation

Owners are not personally liable for the malpractice of other owners

Nonprofit Corporation

The full tax benefits and advantages can only be utilized by businesses that have been incorporated for a charitable, educational, scientific, religious or literary purpose

If property is transferred to the nonprofit corporation, the property must stay with the corporation. Even if the corporation ends, the property must go to another nonprofit

Limited Liability Company (LLC)

More expensive to establish than a sole proprietorship or partnership

Professional Limited Liability Company

Allows state licensed professionals to enjoy the same advantages as a LLC

Same disadvantages as a LLC

All members must belong to the same profession

Limited Liability Partnership

Have an Attorney Help You with Your Business Structure Today

The operation of your company will be formed largely by the type of business entity you choose, which will depend on a number of factors. There's no one-size-fits-all approach to making this decision, and an attorney will be able to help you determine what's best for your small business. Get started today and contact a local business organizations attorney.

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Benefits and Drawbacks of Different Types of Business Entities - FindLaw

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When you start your business, you will have to decide on which type of business entity you will be: sole proprietorship, partnership, limited liability company (LLC), corporation, or nonprofit. The type of business structure you choose will depend on several factors, including the nature of the workforce within your organization, the goal of the company, and so on.

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BBC Bitesize - GCSE Business - Forms of business ownership - Revision 1

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Learn and revise about business ownership including sole trading, partnerships, limited companies and franchise with BBC Bitesize GCSE Business Studies.

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Types of Business activity

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Project 4 - Types of business activities Flashcards | Quizlet

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Principles of Business - Business to the Rescue Learn with flashcards, games, and more - for free.

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Business Legal Structures

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Types of Business Legal Structures - How Business Legal Structures Work | HowStuffWorks

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Now let's talk about the basic advantages and disadvantages of each type of structure.

Sole Proprietorship

Simple Definition

A legal form of business that makes no legal distinction between the individual owner and the business itself.

Advantages

Disadvantages

Other comments

Typically the sole proprietorship is set up as the owner's name (e.g. Bob Smith). The owner can choose to operate his or her business under a different name (e.g. Smith's Lawn Care) but then must file a doing business as form with the appropriate government body.

It is possible to self-insure yourself against the personal liability assumed by this structure.

General Partnership

Simple Definition

Similar to a sole proprietorship but with multiple owners (a sole proprietorship cannot have more than one owner). Like a sole proprietorship, a partnership is not a separate legal entity from its owners.

Advantages

Disadvantages

Other comments

The partnership agreement is the rule book of the partners. This can be drafted with the help of a qualified lawyer to help the partnership deal with such issues as:

Initial investment of partners

Distribution of profits and losses

Each partner's responsibilities

New partner entrance into partnership

Old partner exit from partnership

Limited Liability Partnership

Simple Definition

Similar to a general partnership but with a separate classification of partners (see Other Comments section below for further explanation).

Advantages

Disadvantages

Other comments

As opposed to a general partnership, a limited liability partnership has two kinds of partners, general and limited. General partners are similar to those in general partnerships they operate the business and assume liability. Limited partners, on the other hand, are merely investors and, therefore, have no control or operational power. They do have limited liability.

C-Corporation

Simple Definition

A legal form of doing business that creates a separate legal entity from the individual owners. This legal entity can act and do business on its own just as a person would do (i.e. borrow money, enter into lawsuits and contracts, etc.).

Advantages

1. Shareholders are not personally liable

2. Ownership is easily exchanged between individuals

3. Company does not cease to exist with the death of owners

4. Easy structure for which to raise capital

Disadvantages

Other comments

It is important to remember that a C-corporation is considered a separate legal entity from its owners. This is the source of its relative advantages and disadvantages, especially regarding taxes and liability.

S-Corporation

Simple Definition

A type of corporate legal form that is taxed like a sole proprietorship. Its formation is subject to certain legal criteria such as a maximum number of shareholders.

Advantages

Owners are only taxed one time. Shareholders are not personally liable

Disadvantages

Higher administrative costs to setup and run than partnerships and sole proprietorships. More regulations than partnerships and sole proprietorships. Certain limitations on who can be an owner (U.S. citizens, etc.)

Other comments

S-corporations are limited to a certain number of shareholders (75), whereas a C-corporation can have unlimited shareholders.

Limited Liability Company (LLC)

Simple Definition

A hybrid legal form of business that is taxed like a sole proprietorship with the same liability protection of the corporate structure.

Advantages

Owners are only taxed one time. Shareholders are not personally liable

Disadvantages

1. Higher administrative costs to setup and run than partnerships and sole proprietorships

2. More regulations than partnerships and sole proprietorships

3. Limited life of entity (usually limited to 30 years)

4. LLC laws are not uniform and therefore doing business in multiple states as an LLC can be complex

Other comments

The L.L.C. is an extremely popular structure. Since there are many similarities between LLCs and S-corporations, the list below shows some of the differences:
LLC relative advantages over S-corporations: LLC relative disadvantages over S-corporations:

1. Need at least two people to form an LLC (S-corps only need one person)

2. Limited life (S-corps are perpetual)

3. LLC members need other members' approval to sell their interest (S-corps owners need no such approval)

4. LLC may have to pay more self-employment taxes than S-corps due to IRS regulations forcing active LLC members to pay self-employment taxes on both salary and distributions from the company, as opposed to S-corps members who do not have to pay taxes on distributions.

The key factors that differentiate structures are summarized in the chart below:

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Now let's talk about the basic advantages and disadvantages of each type of structure. A legal form of business that makes no legal distinction between the individual owner and the business itself. Typically the sole proprietorship is set up as the owner's name (e.g. Bob Smith).

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What's the best way to keep a company's spirit alive while at the same time trying to modernise it?

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Internal and External Environments

If there is anything that is steadfast and unchanging, it is change itself. Change is inevitable, and organizations that don't accept change and that make adjustments to their business model to keep up with changes are doomed to fail. There are events or situations that occur that affect the way a business operates, in a positive or negative way. These events or situations can have either a positive or a negative impact on a business and are called environmental factors.

There are two types of environmental factors: internal environmental factors and external environmental factors. Internal environmental factors are events that occur within an organization. Generally speaking, internal environmental factors are easier to control than external environmental factors. Some examples of internal environmental factors are:

Management changes

Employee morale

Culture changes

Financial changes and/or issues

External environmental factors are events that take place outside of the organization and are harder to predict and control. External environmental factors can be more dangerous for an organization given the fact they are unpredictable, hard to prepare for, and often bewildering. Some examples of external environmental factors are:

Changes to the economy

Threats from competition

Political factors

Government regulations

The industry itself

The SWOT Analysis

SWOT is a structured planning tool that can be used to evaluate the strengths, weaknesses, opportunities, and threats involved in running a business venture. Using a SWOT analysis can be used to help a business determine the advantages or disadvantages of changes they want to make based on internal and external factors. A SWOT analysis can be broken into two distinct parts. The strengths and weaknesses are based on internal environmental factors. Opportunities and threats are based on external environmental factors.

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internal and external environments of business - video & lesson transcript | study.com

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Internal and External Environments of Business - Video & Lesson Transcript | Study.com

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If there is anything that is steadfast and unchanging, it is change itself. Change is inevitable, and organizations that don't accept change and that make adjustments to their business model to keep up with changes are doomed to fail. There are events or situations that occur that affect the way a business operates, in a positive or negative way.

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When you run a business, making the most of it becomes the prime purpose of life. Both big and small business owners need to conduct various analyses. There are many methods, which help to conclude about the firm's current state before taking an informed decision. SWOT analysis is perhaps the most commonly used technique. STEEP, STEEPLE, and PEST are also used by individuals and companies.

Before I discuss the other methods, I would like to talk about SWOT.

SWOT analysis often talks of the basics of business. People see it as so important because the method evaluates a project or business venture's strengths, weaknesses, opportunities, and threats. The initials of these factors make up the acronym SWOT.

Business owners or project managers apply this structured planning method to know where their venture stands. The analysis' benefit is not limited to companies or industries only. You can carry out SWOT for products, places, and even people too. Both new and existing businesses can use it.

The process involves stating the business goal. The aim of SWOT is to identify the favorable and unfavorable internal and external factors to reach the goal. You can call the degree to which a firm's internal environment matches with its external environment as strategic fit.
Strengths:
Assess the characteristics of your business that give it an advantage over the others in this step. Questions like the following are often asked when considering Strengths:

What does your business do better than others?

What advantages does it have?

What lowest-cost or unique resources do you have which others do not?

What does the market think your strengths are?

What factors help you sell products?

What is your Unique Selling Proposition?

Weaknesses:
These are characteristics that place the business at a disadvantage when compared to others. Answer the following questions:

What could your business improve?

What should the firm avoid?

What does the market think your weaknesses are?

What factors could lose you sales?

Opportunities:
In this part, consider elements that the project could profit from. The 2 most important questions to ask in this section are:

What good opportunities can you think of?

What are some interesting trends in the market?

Threats:
Find out what elements in the environment could cause trouble for your business or project. Some of the questions you can ask here are:

What are the obstacles?

What are the competitors doing?

Are the quality standards or specifications for your products, services or job changing?

Is technological advancement threatening firm's position?

Do you have cash-flow problems or bad debt?

Could your weaknesses threaten your business seriously?

There are other tools used to find out an organization's current status and position. PEST, STEEP, and STEEPLE analysis help assess the company's external environment and current role. All have the same goal and you can perform them, in the same way. You can use them for future planning and strategic management. Which one of them you will choose depends on the nature of your business or project.

A traditional SWOT analysis would take the context of STEEP and STEEPLE to analyze how certain factors may impact. It is often conducted with either STEEP or STEEPLE analysis. Many think it is an interesting exercise.

PEST analysis studies 4 dimensions, like SWOT. The factors considered in PEST are Political, Economical, Social, and Technological. It is a precise analysis that helps to understand how each of the factors impacts business. It studies the opportunities and threats section of SWOT, but in more detail.
Political Factors
The Political factors include government regulations and legal issues. It defines both formal and informal rules that a firm must abide by. Below are some factors you should consider:

tax policy

employment laws

environmental regulations

trade restrictions and tariffs

political stability

Economic Factors
The economic factors affect the potential customers' purchasing power and company's cost of capital. These are some related factors:

economic growth

interest rates

exchange rates

inflation rate

Social Factors
Social factors involve the cultural and demographic aspects of the external macro-environment. The following factors impact customer needs and size of markets:

health consciousness

population growth rate

age distribution

career attitudes

emphasis on safety

Technological Factors
These factors can remove or lower barriers to entry. They can also reduce minimum efficient production levels and sway outsourcing decisions. Some of the technological factors are:

R&D activity

Automation

technology incentives

rate of technological change

STEEP analysis consists of all these factors but has an additional factor. In STEEP analysis, you have to assess environmental factors too.
Environmental Factors
The environmental factors assess what kind of impact the company is having on the environment. The impact can either be negative or positive. Usually, this affects agricultural firms. Some factors to consider are:

water, wind, soil

food

soil energy

pollution

environmental regulations.

STEEPLE analysis is another step ahead. When conducting STEEPLE analysis you have to study Legal and Ethical factors.
Legal Factors
These are factors, which deal with legal complications. You need to constantly check on new legal requirements to ensure compliance. The factors you should consider are:

Legal restraints and regulations

Health and safety of employees

Ethical Factors
Ethical factors are all about the social values, which govern business behavior. These act as the foundation for what is right and what is wrong. You must always check the ethical factors of your company. These do not change overnight, but small changes in morality are common.

When business owners want to spend a lot to analyze the internal competencies of their company, they perform SWOT analysis. To learn more about the firm's external factors they can use PEST, STEEP and STEEPLE analysis.
Image: Stokkete/Shutterstock.com

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Difference between SWOT, PEST, STEEP and STEEPLE Analysis

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When you run a business, making the most of it becomes the prime purpose of life. Both big and small business owners need to conduct various analyses. There are many methods, which help to conclude about the firm's current state before taking an informed decision. SWOT analysis is perhaps the most commonly used technique.

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SWOT, PESTLE and other models for strategic analysis | nibusinessinfo.co.uk

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Introduction to the common business analysis models, including SWOT and PESTLE analysis, scenario planning and Porter's Five Forces framework

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When you are starting a business, you will need to answer many questions. However, one of the most fundamental questions any business owner will be asked is, what is the purpose of your business?

So what would your answer be?

How you answer the question, has a significant bearing on whether your business is likely to succeed, so we asked Jim McGrath, author of The Little Book of Big Management Wisdom to reveal what your answer should be;

There is no chicken and egg question when it comes to customers and profits

When I've asked business owners and managers, in small businesses or start-ups, 'What do you think is the purpose of your business?', I've had a range of answers but the following two are by far the most popular: (before reading on jot down your answer on a piece of paper);

1. The future bankrupts of the world say, 'To maximise profits.'

This shows a complete lack of understanding about what business is all about. Survival. To maximise profits you have to take big risks. Small organisations can't afford to bet the house on long shots as just one miscalculation can destroy them.

2. The more sensible owners and managers often say, 'To make a reasonable profit year on year.'

This is a sound economic answer but it shouldn't be the business person's answer. Why? Because it shows a lack of understanding about the true nature of business and where profits come from.

A business' most important relationship is with its customers

A good business is built upon a series of interlocking relationships between the organisation and its stakeholders and the most important relationship for any business is with its customers.

Peter Drucker, the only true genius that the discipline of management has produced in a 100 years, realised this and argued that the primary purpose of a business was to create and retain a customer. Everything else flows from that imperative.

Without a customer you cannot make a sale and without sales you can't produce a profit and without profits you can't survive. So stop obsessing about profits and instead focus on the source of all current and future profits - your customers.

If you build and nurture your customer base, profits will follow. Happy customers will tell their friends and colleagues about you. But if you concentrate on profits unhappy customers will leave and tell anyone who will listen how bad your organisation is.

How to build a loyal and growing customer base

So how can you build a loyal and expanding customer base? Here are a few ideas that will help you get started. Some of them may seem simple, even self-evident, but you'd be surprised how many organisations fail to apply them.

Change your thinking

As a start-up or small business stop thinking that you are in the tech, media or restaurant business and start to think, 'I'm in the relationship business.'

This will be difficult for many of you. Your business is probably based on your expertise. While you must retain and improve that expert knowledge you must also go beyond it and create a great relationship with your customers.

If you don't, then no matter how good your product is, your venture will fail.

Treat customers with care and respect

But it's no use if you alone treat customers with care and respect. Every member of the organisation has to do the same.

Don't allow staff to chunter on about how wonderful work would be if they didn't have to deal with customers and their stupid unreasonable complaints.

Such an attitude quickly becomes embedded in the culture of the organisation and when that happens it's a major problem to eliminate. It seeps into every interaction between staff and customer, eating away any goodwill that might exist.

Staff training will help to improve customer care but you need to go beyond the basic mechanics of how to deal with customers. Start by emphasising the central importance to the organisation of customers.
RELATED: The 4 Rs of getting more business from your existing customer base
Ensure everybody in the business is customer-focused

Explain the power that customers exercise over the business and the dangers of assuming that they won't move supplier. (The only customers who never move suppliers are football fans. Even when our team is rubbish and the board treats us like morons we stay).

Satisfied customers seldom change suppliers. Unhappy customers do it all the time.

Today, any customer who leaves because they felt exploited and underappreciated can explain in excruciating detail on social media why they left. If they can make their message amusing it can go around the world in 24 hours.

Therefore, regardless of what your marketing book or guru tells you never offer better deals to new customers than those offered to existing customers. New customers are essential to any organisation but don't risk losing an old friend just to attract a new customer who may be the original customer from hell.
RELATED: How to attract customers from heaven - not clients from hell!
Communicate with customers regularly

Communicate with customers regularly. Use email, phone and personal visits to develop your relationship and understanding of their needs. Listen to what they have to say about your products and how they can be improved.

Ask them about new products they'd like to see developed and what your competitors have on offer. Always be on the lookout for new ideas and when you see one don't be afraid to back it.

Trust can take years to build and can be lost in the course of a single phone call. Your word is only valuable when you are called on to do something that costs you time, money or effort. Therefore, never renege on a deal or your promise even if it means a short term loss or inconvenience.

Treat customers as adults. If there's a problem or a delay don't wait for them to discover it. Contact them and explain the situation. Most people are reasonable and will understand the problem you have and will appreciate that you contacted them.

Reward customer loyalty and prompt payment by offering selected customers higher discounts, better payment terms, special deals and invitations to special events.
RELATED: How to turn your customers into your best sales force
Conclusion

Customer care has become an industry in the last 25 years. Like other movements it has its high priests and gurus but really everything it has to say can be summed up in one short sentence ' Treat your customers as you like to be treated.'

As a little exercise think of all the things that drive you wild as a customer, then consider how many of them are present in your organisation and do something about them.

About the author

This article has been written exclusively for ByteStart by Dr Jim McGrath. Jim has published eight non-fiction books, his latest, The Little Book of Big Management Wisdom was published in November by Pearson, priced £10.99. His second Novel, A Death in Spring: 1968 was published in December. Find out more on Jim's blog.

More on customers

For more help on being as effective as possible, try these other ByteStart guides;

Customers

More help from ByteStart

ByteStart is packed with help on all aspects of starting and running your own successful business, just some of our other popular guides include;

Leading a business

Getting the best out of yourself

Employing staff

Motivating your team

Going for growth

Funding your business

Tagged as: business owner, business start-up, customer, customer engagement, customer experience, customer loyalty, customer relationship, customer retention, existing customers, new customers, startup

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When you are starting a business, you will need to answer many questions. However, one of the most fundamental questions any business owner will be asked is, what is the purpose of your business? So what would your answer be?

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Business structures

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Sole Trader

Requiring minimal set up and administration, operating as a sole trader is common for new businesses. Registration at Companies House is not required although the business owner should notify HMRC. This type of business is not deemed to be a legal entity in its own right, consequently the owner of the business has unlimited liability to all debts and legal actions.

Whilst sole traders benefit from fewer regulations and reduced filing requirements, the personal risk associated with this type of business may act as an incentive to register as a limited company.

Private Limited Company (LTD)

Requirements for forming a Private Limited Company

 At least one director over the age of 16 must be appointed.

 The company must have a registered office in the UK.

 The company name must comply with Government regulations

 At least one share must be issued at the time of incorporation.

A private limited company is a legal entity in its own right and is separate from those who own it in the eyes of the law. This is a major benefit to operating as a limited company as the liability of the shareholders is limited to their investment and any unpaid shares they own. The personal assets of a shareholder would not be exposed if a limited company is dissolved.

Due to the limited liability, potential tax advantages and simplicity of operating as a limited company this is one of the most popular business structures in the UK. Once the company is incorporated, information regarding the filing history and current appointments is made public available on the Companies House register. This affords limited companies with a level of transparency which is regarded as a significant advantage when doing business.
Limited Liability Transparency
Public Limited Company (PLC)

In parallel to its private counterpart, PLCs exist as legal entities in their own right. Furthermore the liability of the members is limited to their investment and the value of their shares. In contrast to a private limited company, the shares of a PLC can be traded in the public market and this is often used to raise finance.

The operating costs of running a PLC are considerably higher than private companies and this structure is generally suited to larger enterprises.A minimum of £50,000 worth of shares must be issued before a company can be registered as a PLC. It is also a legal requirement for at least two directors to be appointed.
Minimum of £50,000 shares
Limited Liability Partnership (LLP)

Operated in a similar way to a traditional partnership, an LLP is also afforded the benefit of limited liability. The objectives of an LLP are generally profit driven and this structure is favoured in professions such as law and accountancy. A minimum of two partners must be appointed as the 'designated' members and it is these partners who are responsible for the day to day running of an LLP.

You can find more information a Limited Liability Partnerships here.

Guarantee Company (Non Profit)

Limited by Guarantee companies are, quite simply, not for profit companies. Any profits generated are reinvested into the company and are used to achieve the objectives of the company which are often charitable in nature. The members of this type of company are classed as decision makers rather than owners of the company.

For more information on forming a company limited by Guarantee please contact us.

Limited Partnership

A limited partnership (LP) is a legal registered entity at Companies House. It consists of two or more partners, who can be individuals or corporate entities. In a limited partnership there are 2 types of partner and they have different roles and responsibilities. Each LP my must have at least one General Partner AND one Limited Partner. We do not assist with registering limited partnerships.

You can find more information on limited partnerships here.

Ready to start your limited company?

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Requiring minimal set up and administration, operating as a sole trader is common for new businesses. Registration at Companies House is not required although the business owner should notify HMRC. This type of business is not deemed to be a legal entity in its own right, consequently the owner of the business has unlimited liability to all debts and legal actions.

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Business Types

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Each business type has a range of advantages and disadvantages, whether you're a sole trader or business partnership, a limited company or even a franchisee, you'll need to be on the ball when it comes to filing your financial returns.

Here you'll find the key points for the different types of business ownership and there's more detail on each within our guides.

Self-employed / sole traders

Setting up as a sole trader doesn't mean that you have to work alone - you can still take on employees.

It does mean:

You have sole responsibility for your business.

You can keep all of your profits after tax.

You're responsible for paying your own tax and must register for Self Assessment.

You're liable for your business debts, putting your personal wealth at risk.

Business partnerships

As a business partnership you don't need to register with Companies House, but that doesn't mean you don't have to file returns.

It does mean:

You can keep your share of the profits after tax.

You're responsible for paying your own tax and must register for Self Assessment.

One of you must register the partnership with HMRC.

You're liable for your business debts, putting your personal wealth at risk.

Private Limited Companies

Setting up a private limited company you'll need to register with Companies House. This doesn't mean it's difficult to set up - especially when you use the services of a formations agent.

It does mean:

You may be protected from higher personal income tax rates.

You could take advantage of other tax savings.

You're not personally liable for business debts.

You'll need to file statutory annual accounts and a company tax return.

Public Limited Companies

A public limited company gives you the opportunity to offer shares in your business to the public. This doesn't mean you have to!

It does mean:

You'll benefit from tax savings and advantages.

You're not personally liable for business debts.

There's much more scope for finding investors.

You'll need to file statutory annual accounts and a company tax return.

Franchises

Taking on a franchise means you won't have the set up involved in starting a new business from scratch.

It does mean:

You'll be trading under an established brand.

Learnings and processes will already be made for you.

You'll benefit from a ready made network.

You'll have very little or no control over business direction or your profits.

Forming a limited company is easy with The Formations Company and you can find out more about our packages here.

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Each business type has a range of advantages and disadvantages, whether you're a sole trader or business partnership, a limited company or even a franchisee, you'll need to be on the ball when it comes to filing your financial returns.