What is the right company structure for your business?
When you’ve come up with a business idea, you need to take the plunge and formally establish the company. However, if you have a great idea you might not necessarily know the best way to structure your business.
There are numerous options, and here we will find out what the best company structure for your business is. There are three main options that are suited to most businesses:
Limited by Shares
There are many companies formed in the UK that are Limited by Shares. Basically - whenever you see a company name followed by the letters ‘Ltd’, this is normally what they are referring to.
The ‘limited’ aspect of this type of company is essentially referring to the liability that you have as a company for any failure. With a limited company - your liability is limited, so you personally won’t be responsible for paying back losses if the company fails.
It’s a very flexible type of company, and it gives you a lot of leeway. If you’re ambitious and planning on growing your company very fast, a limited by shares company is probably a good bet.
You will be required to name directors and shareholders when you do this and submit them to companies house. There are reporting requirements that must be filed annually. It’s worth noting that Limited By Guarantee companies - ideal for charities - do not have shares).
Limited Liability Partnership
The limited liability partnership is quite similar to a limited by shares company - except that it is formed as a partnership between 2 or more people - whereas a Limited by Shares Company can be formed with just one person. As a partnership, any decisions with regards to profits and other areas of the company need to be approved by all partners.
There are some benefits to a limited liability partnership (LLP) including:
- Partner Flexibility - Members can leave an LLP relatively easily, this is beneficial if you’re developing a company with a partner who may at some point leave the business.
- Tax - As a partner in an LLP you have self-employed status, so this makes tax less complicated and allows you to have more flexibility on National Insurance payments.
- Profit Allocation - It’s easy to allocate where profits go to in a quite simple way, and it’s not a formal process to do so - unlike an limited company.
The LLP is a good structure for many businesses, especially those involving partnerships (obviously) like law firms, financial trading firms and accountancy practices - if you are going into business with one or more person, this type of company structure is a viable option.
Setting up as a sole-trader is the first stop for many people. As many entrepreneurs find themselves with no other people around, with large amounts of people working from home offices, it’s plain to see there is a practical reason for all of this.
If you’re going into business as an individual, sole-trader status is a good way to go. It’s helpful in the following ways:
- Easier Tax - If you’re a sole-trader you will be filing a self-assessment tax return, which gives you an easy way of making paying tax on your earnings.
- Flexible - It’s simple to stop and start trading as a sole-trader, it’s much less complicated than forming and dissolving a limited company.
- Changeable - If you’re just starting out as a business, you might work as an employee whilst it gets off the ground (or perhaps return to employment full-time and go back to the business at a later date) so sole-trader structure affords you the opportunity to flit back and forth as required.
One thing to mention about sole-trader companies is that your liability is not limited, you will assume liability for any losses your company sustains should the business fail. Keeping your small business idea in line with what you can achieve is a good idea.
Depending on your needs, you might want another type of company. If you’re a non-profit or a charitable organisation then a limited by guarantee company can be helpful - in this instance the company does not have shareholders but rather ‘members’ who act as guarantors.
Another option, if you’re planning on trading a lot internationally, is an offshore company. These have the flexibility to be used in multiple jurisdictions - and the reporting requirements are often less stringent which makes the process of running a company internationally much simpler.
How To Register Your Company
Company Formation MadeSimple is an approved e-filing partner of Companies House. To date Company Formation MadeSimple have registered over 400,000 UK limited companies and offer a number of online formation services for first-time formers and serial entrepreneurs alike.