Starting your own small business? Congratulations! Owning and operating a business can be an incredible growth opportunity — personally, professionally, and financially. But remember, there's lots to be decided and planned before you start. And one of them is deciding on the best legal structure for you and your business.
There are a number of different options when setting up a new or small business. These may depend on the size of the business, the number of owners and the level of risk owners are willing to take. In this blog post, we’ll focus on the most commonly chosen start-up routes below:
Sole Trader (sole proprietorship)
Partnership
Limited Liability Partnership (LLP)
Limited Liability Company (Ltd)
Sole Trader
A business that is owned and run by just one person. There is only one owner, but they may have employees who work for them. This is a popular choice for many small start-up businesses as you have flexibility and full-control. However, there are risks as sole traders have unlimited liability meaning the owner is personally responsible for the debts of the business. Another thing to note is that a sole trader pays income tax on their earnings.
Partnership
Summary: A partnership of between two or more individuals who share management and profits. In a partnership the owners agree a set of rules outlined in the deed of partnership, such as how profits are allocated, what percentage of the business each person owns, their roles and responsibilities, and the percentage of any business debts that each person is repsonsible for. The owners in a partnership will also pay income tax on their earnings.
Limited Liability Partnership
Different to standard partnerships as some or all of the partners have limited liabilities, which separates the owners from the legal entity of the business. This is covered by the Limited Liability Partnerships Act 2000.
Limited Liability Company
This is a private company whose owners are legally responsible for the business debts, but only to the extent of the amount of capital they invested. It can be a small or large business and the owners of a private limited company are known as the shareholders. Shareholders have to be invited by the business before they can purchase a share of the business. There's more paperwork to do here (registering with Companies house for example) and you must pay corporation tax on the profits of the business.
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