Different types of business structures in the UK
What are the main types of businesses?
So, you’ve got an excellent business idea all set up and ready to go – but do you know where you should position your brand? By understanding the different types of business, you can decide which option is best for you.
Whether it’s a sole trader, partnership or limited company, learning the differences could be the first step to making your decision.
A sole trader (external link) is possibly the most popular company type entrepreneurs opt for. It is owned, as the name would suggest, by a sole individual (you) who acts as a self-employed, unincorporated business holder.
The positives to choosing this business type mainly come in the form of having full control over your business. As there is no ‘separation’ between owner and business, this means that you can keep all profits after you’ve paid tax, as the sole owner and worker in your business.
However, due to this lack of separation in legal identity, there is not much protection when it comes to business liability issues. Therefore, you would share the blame with your company if any legal matters arose or in the case of bankruptcy.
As an example, when looking at a sole trader business vs. a limited company (external link), the owner/s of the latter are legally ‘separate’ from the business. Consequently, limited company owners have no personal responsibility when it comes to:
- Resolving legal issues.
On the other hand, as a sole trader, you are responsible for any and all business losses. You are also responsible for the upkeep of your sales and expenses records and those all-important yearly Self Assessment tax returns (external link). Still, there are plenty of accountants out there who would be happy to lend a hand.
Typical professions that opt for sole trader statues include construction companies, health and beauty businesses, freelance creatives, and catering businesses.
Put simply, a partnership is one of the many popular company types owned by two or more people. It is similar to a sole trader setup in that the owners are responsible for business liabilities, and company EBITDA is treated as owner earnings.
However, there are a few different types of partnership to consider before you jump in.
In an ordinary partnership, every partner has equal ownership, meaning profits are split equally among everyone.
Within this structure, every partner has shared responsibility for business liabilities and the actions of other partners. This means that personal assets and finances can be used to repay debts and legal fees if the business itself does not have the resources.
Within a limited partnership, there must be at least one ‘general’ or ‘ordinary’ partner and one ‘limited’ partner. The ordinary partners have a shared and equal responsibility for settling any debt the partnership owes.
Limited partners fund the business but cannot actively manage company procedures. If, as an LP, you do begin to take on management responsibility, you can lose your limited status and, thus, the protection it offers against financial issues. As an LP, your liability is measured against the size of your financial stake in the company.
Limited liability partnerships (LLP)
Limited liability partnerships are similar to ordinary partnerships, in that they have multiple owners. However, these owners are not responsible for each other’s actions, nor are they responsible for any business liabilities.
This structure is not suited, or available, for all business types. LLPs are usually restricted to the financial and legal sectors – for example, accountants, lawyers, and solicitors.
Overall, partnerships offer high flexibility but can come with more financial risk for individual owners. Therefore, LLPs are usually the best fit for financial and legal aid providers, or those in the healthcare sector.
When looking at the different types of business structure, a limited company could be worth considering, depending on the size of your company.
As with LLPs, a limited company is considered to be a separate legal entity to its owners and shareholders. For that reason, partners do not share responsibility for company liabilities, also known as limited liability (external link).
For example, your business would be protected from dissolving if you or a fellow partner cannot repay debts, declares bankruptcy, or pass away.
Partners within limited companies are referred to as members, which can be individuals or even other businesses. This structure means that your company can have multiple shareholders, and benefit from limited tax payments (external link). Limited companies themselves pay Corporation Tax (external link) at a capped rate, while their directors and shareholders pay Income Tax and National Insurance contributions on their individual salaries.
Tech companies, retail businesses and consumer goods providers may opt to become limited companies due to this flexible shareholder structure and tax and liability allowances.
Other types of business structure
There are a few more, often less common, company types that owners can opt for.
The definition of a charity is defined and monitored by law, so it may be wise to ensure your company lives comfortably within these guidelines.
- Business operations and subsequent profits used solely for the benefit of the public
- Services that are considered undisputedly ‘charitable’. For example, solely for the benefit of others and not for personal profit or gain
- No role providing ‘private benefit’ to individual parties
A business becomes a franchise (external link) when the original business owner licences said business to one or more other parties. Once franchised, the new owner/s can use its trade name, trademarks, and other business identifiers.
A freelancer is, quite simply, someone who is self-employed and works for themselves. You are representative and responsible for all your business assets and, while you don’t hold any employment contracts with other companies, you can be subcontracted.
At Hiscox, we want to help your small business thrive. Our blog has many articles you may find relevant and useful as your business grows. But these articles aren’t professional advice. So, to find out more on a subject we cover here, please seek professional assistance.