What type of business structure will I need?

It’s important to consider the best type of company to meet your business needs and roles.

You must choose a structure for your business and it will define your legal responsibilities for:

  • The paperwork required to get the business started.
  • The taxes you’ll have to manage and pay.
  • How you can take the profit the business makes.
  • Your liabilities if the business fails or makes a loss.

Remember, the type of company you chose is not about the size of the business but more about how your business deals with trading ‘liability’ to customers.

Let’s assume that we are talking about setting up your business for just you alone or with a couple of friends/others. This will be a micro-business – a what?

The Companies House (the UK’s holder of public records of registered companies) definition of a micro-entity is a business that meets at least two of the following conditions:

  • turnover must be not more than £632,000.
  • the balance sheet total must be not more than £316,000.
  • the average number of employees must be not more than 10.

So, its most likely you’ll start as a micro-business.

The first question you must ask is – Do I intend to make a profit?

This is an important question because you can form an ‘unincorporated association’ if you’re setting up a small club or group and don’t intend to make a profit. There are also separate rules for Charities and while Data Protection rules still apply, you may not have to register with the Information Commissioner’s Office (ICO) as a Data Controller (it sounds complex but isn’t and so we cover this at the end of this introduction).

This introduction and the courses assume that you are starting a business to make a profit and so we will cover only very briefly, other forms of business structure.

Businesses are regulated by the Companies Act 2006 and HMRC regulations.

 

There are 3 basic and common types of company which we will cover:

  • Limited Company.
  • Partnerships (ordinary and Limited Liability Partnerships).
  • Sole-trader (a person solely responsible – but the business can still have employees).

 

The first two types of business have ‘limited’ in the name and this refers to the fact that they are regulated and controlled by laws which treat the company as an individual, a ‘person’.

So what? It means that the company can be held liable for loss or damages but the owners and ‘staff’ cannot – except in circumstances of an owner-director/individual breaks the law – gross negligence, fraud or corporate manslaughter for example.

In the overall UK business population, there are approximately:

  • 1.8 million companies (32%),
  • 421,000 ordinary partnerships (8%).
  • 3.3 million sole proprietorships (60% of the total),

There are a number of other types of company covered by law:

  • Industrial & Provident Societies Acts – Housing Associations.
  • Building Societies Act 1986 – building societies.
  • Health and social care Act 2003 – NHS Foundations Trusts.
  • Community Interest Company.
  • And then others are established by Charter like universities.

 

As a starting position and working for yourself, you are considered a self-employed sole-trader for legal and tax purposes.