Common business types

When we’re born, we are registered and have a birth certificate and the same is true of a company – however, some different rules apply.

Companies with ‘limited liability’ are required to be registered at Companies House and submit annual reports which are available to the public. They are required to operate within certain regulations.

Let’s start by outlining each type of business structure and we’ll cover each type in more depth in the specific courses.

This will give you enough to think about, if not decide, which types of company you should start.

Let’s look first at the most complicated but also the safest in terms of personal liability.

 

DO NOT GET PUT OFF BY HOW COMPLICATED IT LOOKS AT THE BEGINNING – ALL THE STRUCTURES ARE EASILY FORMED AND CAN RUN FOR LESS THAN A FEW £100 A YEAR!

 

Limited Company

  • You set up an organisation, which you may own outright, to run your business,
  • The business is treated as an individual in law,
  • ‘It’ not its owners or staff is responsible for the business or its debts (unless they have broken the law),
  • Its finances are separate from your personal finances,
  • Most are limited by ‘shares’ which means the maximum liability is the share value.
  • It can employ you, use money to pay you in salary and use its profits to pay dividends to you and other ‘shareholders’,
  • Limited companies have;
    • A person(s) or organisation(s) that owns the shares of the company,
    • A director(s) who is responsible for running the company,
    • A defined purpose – The ‘memorandum of association’ is the document which sets out the legal status of the company and its purpose – like a birth certificate it has the companies’ name, country, objectives, and founders (including the founders’ signatures),
    • Articles to explain how the company will be structured and run.
  • The company must:
    • Put together legal accounts in a specific format.
    • Provide an annual report (called a ‘return’) to Companies House,
    • Send a Company Tax Return to the taxman (HMRC).
  • If you are the(a) director of the company;
    • You must fill in a self-assessment tax return each year,
    • Pay tax and National Insurance through PAYE if you take a salary.

Who is it good for?

Limited Companies are good for growth businesses, where you don’t want to be personally liable for the debts your business might incur, when you want to employ several people and/or you want to raise money externally – additional investment in return for shares in the company.

 

Partnerships

Let’s say that you want to team up with some ‘mates’ to deliver a service – usually professional partnerships like consultants, doctors or lawyers. As a group you decide on the risks you face from bad ‘advice’ or practice and, you consider an ‘ordinary’ or a limited liability partnership (LLP) structure based on the guidance below;

  • Ordinary;
    • In a business partnership, you and your partners share the responsibility for your business.
    • Partners do not have to be people, they can be businesses in themselves.
    • You elect to share the profits between the partners in an agreement – often related to the amount of income generated for the business.
    • Each partner pays tax on his earning/profit share from the business.
    • Each partner is responsible for their share of any losses your business makes and you share liability.
    • You offset things like bills for things you need to conduct your business (like stock or equipment) against tax.
    • All the partners must:
      • Fill in a self-assessment form for tax purposes,
      • Pay income tax on all earnings,
      • Pay National Insurance.
      • Your partnership should be registered for tax (VAT) if the partnership earnings are expected to exceed £83,000.

If you are worried about your personal liability you can form a Limited Partnership (LP) or a Limited Liability Partnership (LLP);

  • Limited Partnership (LP) or a Limited Liability Partnership (LLP);
    • In addition to the rules for an ordinary partnership, in an LP the liability for debts that can’t be paid are split between the partners.
    • Two forms of partners can be included:
      • General partners can be personally liable for all of the partnerships debts.
      • Limited partners are only liable for debts up to the amount they have invested into the partnership.
    • LLPs are formed and registered with Companies House.
    • Like a company, the firm is responsible for the debts of the partnership and the partners are not personally liable beyond their investment in the LLP.
    • As well as the tax returns required of an ordinary partnership, the LLP must make annual ‘returns’ (a report) for public record

Who is it good for?

Partnerships are good for professionals who share common or complimentary skills and wish to provide those as services to others – typically a group of experts who want to form a consulting practice.

 

Sole Trader

In this case, you want to run your own business as an individual, part of ‘you’, and you know that you can and may employ staff.

  • You are solely responsible for the business
  • It is not registered with Company’s House but, it is registered with the tax man (HMRC).
  • You must:
    • Send a self-assessment tax return in annually,
    • Pay income tax on all profit (at your personal rate),
    • Pay National Insurance.
    • Register for VAT if you expect your takings to be greater than £83,000 a year.

Who is it good for?

People who want to start a self-employed business from home like an online shop or for ‘skilled trades’ like plumbing and bricklaying based from home.

Note: If you are going to work in the construction industry as a self-employed sub-contractor there are some additional actions you need to take to register with the taxman. These steps are covered in the sole-trader module.

 

Franchise

Franchises are a special “halfway house” between being employed and your own boss. Companies with a bigger business and a well known brand offer to a “Franchisee” the right to buy into a ‘territory’ or take over a location and run “their” business – an example of these would be MacDonalds where each restaurant is run by a ‘franchisee’ but under the strict control of the parent company.

The degree of freedom, exclusivity and support the company will offer will widely vary and so therefore will the reality of “being your own boss”. It is certainly a different approach to being your own boss however and you will gain experience in running a business. Learn more at the British Franchise Association.