How To Choose The Best Legal Structure For Your Business In The UK

Not legal advice What is meant by a “legal structure”? “Incorporate” means “giving a body to” something Sole proprietor Limited Liability Company Difference between a shareholder and a director Ordinary (General) Partnership Limited Liability Partnership (LLP) Private Company Limited by Guarantee Unincorporated Associations Public Company Limited by Shares (PLC) Factors to consider when choosing a legal structure for your company When forming a company in the UK, most people choose to form a Limited Liability Company. Although this is a popular legal structure in the UK, it is not necessarily the right company structure for you, depending on what your goals and services are. The UK allows you to incorporate your company using various different vehicles. In this article, we’ll cover all the different types of company structures that exist in the UK so as to help you choose the right one for you. Not legal advice Just a quick note that nothing below should be taken as legal advice. We are purposefully providing an “oversimplification” of matters here in order to convey certain high-level concepts. We also do not know your particular circumstances and so are not qualified to offer legal advice. Be sure to seek professional and qualified legal counsel for any matters of law before taking any decisions. What is meant by a “legal structure”? When you are a sole proprietor, your personal finances and your company’s finances are interlocked. One cannot be separated from the other. You are personally liable for the company’s debts as well as for any damage caused by the “company”. Let’s say you are in computer repairs and someone pays you to come over and repair their computer. They then claim that your service further damaged their computer, causing them to be unable to work for seven days. They claim that they lost £1,000 in revenue in those seven days. If they sought legal action against you, then you would be liable for those damages if found guilty, and you would have to pay those costs from your own pocket. There might be ways to mitigate this kind of risk, such as by signing for the right business insurance. But a more common approach is to separate the two legal entities and make the company a “legal person” on its own, and you another legal person. Using this legal structure, you separate your own “existence” from the company’s existence, and you are both treated, in the eyes of the law, as separate legal persons with rights unto each other. “Incorporate” means “giving a body to” something The word “incorporate” comes from a Latin word which means to “form into a body”. The word is used, for example, in fantasy novels or in religious contexts when a spiritual entity is given a physical, tangible form. The same is true of forming a company — an intangible idea is given a tangible form (bank account, physical office location, registration at Companies House) and is thereafter treated as its own “legal person” which is accountable for its actions and liable for its debts. The caveat, of course, is that the company’s money belongs to the company, not to you. Taking money without permission from this particular legal entity equates to stealing. To obtain money from this separate entity, you must either: Receive a salary Receive dividends after following the appropriate legal procedures for obtaining those dividends. For example, if your company is not deemed to be profitable, then it is illegal to obtain a dividend payment from it in the UK. You are also not allowed to demand a dividend payment from a company unless you own a controlling amount of shares in it. Sole proprietor A sole trader is also known as a sole proprietor, freelancer or self-employed person. The biggest pro to operating as a sole trader is that you are allowed to keep 100 per cent of the profits of your business. The biggest con is that you are personally liable for all debt your business incurs. Setting up as a sole trader is also the easiest of all the legal structures. You simply go on over to the HMRC to register for self-assessment the second you start trading. Sole traders are also allowed to employ staff, in which case they must follow all applicable employment laws . Sole traders must keep records of their business’s sales and expenses, and file a self-assessment tax return every year. If you earn more than £85,000 a year (gross), then you are obliged to register for VAT. But you are also able to register voluntarily regardless of whether you hit this threshold. Registering for VAT makes sense if you make a lot of B2B purchases and want to claim back the VAT for them. Sole traders can trade under their own name or create a different business name, but there are certain restrictions you need to be aware of in the case of the latter. Limited Liability Company A limited liability company is a legal structure that limits the personal liability of shareholders for debts, to the amount of initial capital invested in the company by them. That means that, if you invested £1 in initial capital to open up your Ltd, then your personal liability is limited to just that £1. There can be exceptions, of course. If it is proven that you, as a director, have acted in bad faith with regards to the company’s finances and creditors, then you might be held personally liable for your company’s debts. Also, if your Limited has not kept up with its corporate taxes, HMRC might demand that you, as the director, pay those taxes in certain circumstances. But, overall, when business is conducted in good faith, your personal liability is indeed limited by your initial share input. Limited Companies might or might not be the right choice for you, depending on the purpose and activities of your business. Limited companies require more setup than starting up as a sole trader. They also have more initial costs. A limited company’s annual reports and financial accounts must be placed in the public domain, as opposed to a sole proprietor’s accounts which are kept private. Difference between a shareholder and a director In a limited company, the shareholders “own” the company and the directors “run” the company. You can, however, be both a director and a shareholder. In the UK, only one director and shareholder (which can be the same person) are required to form a limited liability company. Therefore, it is not uncommon to find “one-person-shows” that are incorporated as limited companies. You can also register a company secretary if you wish, although this is not a requirement in the UK. There are different numbers of minimum shareholders required in different parts of the world. There are also different rules for whether the sole shareholder and director can be the same person. In Ireland, for example, you will need to appoint a separate company secretary to the director, to form a company. (We can act as the secretary in your Irish company when you  .) If you structure your dividend payments right, it is theoretically possible to reduce your final tax payout by as much as 20 per cent when you register a limited liability company. This is one of the main reasons why so many people decide to set up a limited company in the UK. Ordinary (General) Partnership A crude idea of an ordinary partnership is “two sole traders who are working together”. Each partner must register as a sole trader with HMRC and file a self-assessment tax return at the end of the year. In an ordinary partnership, each partner shares liability for the business. The partners will share losses, expenses, and profits. Each partner will pay their own respective tax on their share of the profits. When setting up an ordinary partnership, it is necessary to choose a name in accordance with the usual rules of naming a business, i.e.: Cannot use “Ltd.” or “Limited” in the name No offensive words Cannot conflict with an existing trademark. You need to name your “nominated partner” and then register the partnership with HMRC. It is the “nominated partner” who is ultimately responsible for record-keeping as well as for managing the partnership’s tax returns. One of the benefits of forming a partnership is that it is relatively easy and flexible to set up in comparison to a Limited company. There are also less annual filings and administrative demands from HMRC than in a Limited. The con, of course, is this matter of shared liability. It is also possible that the liability continues even long after one of the partners leaves the partnership. Limited Liability Partnership (LLP) The main difference between an LLP and a General Partnership is that the LLP will become a separate “legal person”. As such, liability for company debt is limited to the initial capital invested in this partnership upon its formation. An LLP must have at least two “designated members”. These designated members are responsible for the filing of the partnership’s annual accounts. There is no limit to the number of partners that an LLP can have. An LLP’s partners can be natural persons or legal persons, by which is meant that any of the partners can be a sole trader, limited company, another LLP, etc. In a Limited Liability Partnership, each partner’s assets and wealth are protected. Their individual liability is limited to their initial investment as well as any personal guarantees made by them when raising loans. The share of profits each member is entitled to, is determined by an initial members’ agreement. The LLP must be registered at Companies House. LLPs share attributes of Limited Liability Companies as well as General Partnerships. Each individual partner is taxed as an individual, and there are no corporate taxes to be paid, much like a sole trader. But the partners have limited liability for company debts. In some cases, this legal structure might be more tax-efficient than a limited company because there is no “double taxation” situation (corporate taxes on company profits and then personal taxes on dividends). Partners are taxed as individuals, and that’s it. There is also less annual paperwork and administrative burden involved in setting up an LLP — such as no need for an LLP to hold board meetings or shareholder meetings, or to have to make decisions by resolution. The members’ agreement which forms the LLP is not a matter of public record. If an LLP does not trade within one year of formation, then it will be struck off. Private Company Limited by Guarantee This is a popular structure for non-profit organisations. There are no shareholders in a company limited by guarantee. Instead, designated guarantors will put up a “guarantee” amount for the company’s debts and will be responsible for those debts up to that amount only. This means that the guarantors’ personal finances are secure. This structure is popular with sports clubs, membership organisations and charities. Companies limited by guarantee are separate legal persons from the guarantors and have separate finances. A company limited by guarantee generally does not distribute any share profits or dividends but invests profits back into the company. If the company does decide to distribute any of its profits, then it will not be able to apply for charitable status. A company limited by guarantee must be registered at Companies House. This is not the only choice available for charities. A charity might also choose to be structured as a: Charitable Incorporated Organisation (CIO) Unincorporated Association Unincorporated Associations If a group makes an agreement to come together for any reason other than to make a profit (e.g. a sports club, or another type of club) then it is considered an Unincorporated Association. There is no need to register such an association and therefore no costs involved in establishing one (other than the costs the individual members decide to invest out of personal choice). If an unincorporated association begins to make a profit, then it will need to pay corporation tax and file annual company tax returns. Public Company Limited by Shares (PLC) A PLC has shares which can be purchased openly, such as at the London Stock Exchange. If you see that a company has “PLC” after its name in the UK, that denotes that the company is a Public Company Limited by Shares. Examples of such companies are: BAE Systems PLC Associated British Foods PLC Experian PLC Tesco PLC. Whereas private limited companies may not offer their shares for sale to the public, PLCs may. As is the case with private limited liability companies, a PLC shareholder’s liability is limited to the amount of capital initially invested in the company. The minimum requirements for incorporating a PLC in the UK are: Must have a minimum of two shareholders Must have public shares issued to the value of at least £50,000 Registered with Companies House Must have a minimum of two directors. At least one director must be a natural person (i.e. not another company). Must have a company secretary that is qualified to carry out their duties. PLCs are the preferred vehicle for extremely large companies who require raising capital through the trading of shares. Factors to consider when choosing a legal structure for your company If the above choice of legal structures doesn’t immediately answer your question of what type of legal structure to choose for your business, then it might be time to ask for expert help in forming your company. Here are some questions to ask yourself, and factors to consider, to help you work out which structure might be best for you: Are you a one-person show who wants to turn a profit? The clear choice here is either a sole trader or Limited Liability Company. If there’s little risk of you incurring debts you cannot pay, a sole trader choice might be simpler for you because there is less annual administrative burden. If you don’t have a lot of free time on your hands for annual accounts and tax returns, again, sole trader might be the way to go. Alternatively, you could hire an accountant to take care of that for you so that you are free to focuson your business. If there is any chance whatsoever of your company incurring debts it might not be able to pay, despite your sincere efforts to cover them, you should then choose one of the limited options — Private Limited Company, Limited by Guarantee or Limited Partnership. If you are in business to turn a profit, skip Limited by Guarantee. A Limited Partnership or Private Limited Company will serve you better. If you must work together with someone else, either a Limited Partnership, General Partnership or Limited Company might be the best choice for you. If you want to keep all the profits without having to jump through hoops to get them out of the company, an LLP is an easier choice than the Ltd. Generally speaking, a Ltd offers better tax advantages in the UK because the UK’s corporate tax is relatively low (currently 18 per cent). If, however, you don’t expect the company’s profits to go much higher than the minimum personal allowance for income tax then an LLP might be a better choice as you will end up saving on tax. Saving a few thousand quid at the cost of dozens of hours of personal lost time in additional administrative burden might not be worth it. As the saying goes, time is money, and you need to consider both when planning out your company’s legal structure. You could offload all of that additional time by hiring an affordable accountant to take care of yearly accounts and still come out on top with a legal structure that is more favourable tax-wise. Forming a company is a big decision and one that should be taken advisedly and with one’s eyes open. Expert assistance is crucial. The wrong legal structure can end up being a costly or time-consuming burden you must carry on your shoulders for many years. The right legal structure for your company could be just the door you need to open to put you into the financially successful position you always wanted to be in. About author Julia Richards Our head of content, Julia has spent the past 20 years assisting entrepreneurs with all aspects of business launch and growth strategies in various industries around the globe.

Ask friends and family Search in your network Industry events and shows Reach out directly to a local leader Online communities What makes a good business mentor? Nobody makes it alone in this world, even if they give the appearance of doing so. Whether they use a leadership coach, a business mentor or just an experienced friend or partner to act as a sounding board, every successful person has someone who helped them get there. It might be said that behind every successful entrepreneur is an incredible business mentor! Here are some tips on how to find a business mentor worth having. Ask friends and family The first place to look (and often the most overlooked) is in one’s inner circles — one’s family and friends. You can either ask them directly to become a business mentor to you if they are themselves successful in business. Or you could ask them to introduce you to anyone they might know that could act as a business coach to you. In the matter of family and friends, it often occurs that they inadvertently become your mentor without either of you even realising it. If you have a relative or friend that you have always gone to for advice about business, and that advice has worked, then they are already your mentor! There’s no need to “officialise” it. Just keep doing what you’re doing and getting their assistance. You might want to establish a regular time when the two of you could get together for a coffee to bash out ideas. If they’ve been mentoring you all your life, they likely would be interested in taking a more active role in whatever venture you choose to embark in. Search in your network Too many people think that finding a mentor needs to be highly formal. It doesn’t. If you see someone successful in your network and are curious about how they achieved that success, send them an email and ask them. You’ll either get a friendly, supportive answer that ends off with, “Ask me anything, any time.” Or you’ll get no answer at all or a curt answer. If it’s the former, boom, then you probably have a mentor. Mentor sessions don’t need to belong. Fifteen minutes or an occasional email is enough because they are sharing with you all the diamonds of their experience which were found over many years of searching. Industry events and shows Again — networking. When it comes to finding a mentor, nothing beats networking. Follow the same approach as you did when approaching people directly in your network. Ask questions of potential mentors and judge the responses you get. If someone shows an interest in what you’re doing, they might inadvertently become a mentor to you somewhere down the line. Always follow a professional approach to being someone’s protege. Just as the mentor brings you value, so should you bring value to them. Mentors like working with people who show promise, have gusto and are willing to take the mentor’s advice and go with it, possibly even spicing that advice up with improvements. In this way, the mentor also learns things. Reach out directly to a local leader More often than not, you will discover that local leaders are more than willing to share their experience with anyone in the area who shows promise. True leaders are not individuals who sit somewhere on a pedestal and give orders. Real leaders are approachable. They are easy to talk to. They are willing to help. Indeed, true leaders are also extremely busy people, and getting a session with them might be difficult! But remember that mentorship is a two-way street. The mentor will also learn things from you. It is up to you to present yourself in a way — whether through a cold email or a phone call to their secretary — that catches the mentor’s interest. Use respect when speaking to local leaders. Be polite. The leader does not owe you anything. Always take an approach of humility rather than one of haughtiness or arrogance. Online communities There are online communities of mentors as well. Many of these communities are filled with professionals in their field who have decided to give some of their experience back to people who show promise. Start My Business also has one such business mentor service where we link you up with experienced professionals who are likely to provide insightful mentorship advice to you. What makes a good business mentor? Whether online or in-person, the bond between a mentor and protege becomes a strong one. Just as you might be proud to call someone a mentor, they will be proud to tell others of you when you reach your height of success. Mutual cooperation and respect are the keynotes of successful mentorship. The best mentors give advice and don’t expect that advice to be followed blindly. They are even happy when the advice is altered or completely changed, so long as you learned something. The essence of great entrepreneurship is to push the envelope and do things that have never been done before. The best mentors are proud when you evaluated their advice for yourself and did what you thought was best at the end of the day. About author Julia Richards Our head of content, Julia has spent the past 20 years assisting entrepreneurs with all aspects of business launch and growth strategies in various industries around the globe.

1) Bank Loan 2) Crowdfunding 3) Investors 4) Public grants 5) Bootstrapping 6) Family and friends One of the biggest initial burdens that new businesses come up against is how to find funding for their ideas. Funding a business comes in many flavours — small business grants, startup investment, crowdfunding, business loans from a bank, etc. — and deciding which option to go for can be overwhelming. Knowing, also, how to get that funding is key. In this post, we cover all the different ways that a startup can be funded. 1) Bank Loan This is the traditional way to get funding for a business. It requires an excellent business plan which covers all the vital aspects of how you plan on making your new business viable. A business plan must include elements such as: Company mission Product overview Unique Selling Points Revenue Model SWOT Analysis Competitors Analysis Marketing Strategy and Goals Target Customers Milestones and KPIs (Key Performance Indicators) And more A properly written business plan not only is a prerequisite for obtaining a business loan for your startup, but it also helps put some alignment into your business goals. A great business plan helps you see barriers before they arise and thereby increases your chances of being successful. 2) Crowdfunding Crowdfunding appeared on the scene when solid business ideas weren’t getting the backing they needed from investors or banks because of “traditional reasons” (such as a bad credit record, even if the reason for that bad record was unfair). Crowdfunding disrupted the funding scene and is an accessible means of funding for any business or person. Crowdfunding allows a business to obtain small amounts of funding from large numbers of people, as opposed to large funding from only a few people. Well-known crowdfunding sites are Kickstarter and Crowdcube. 3) Investors There’s a difference between an Angel Investor and a Venture Capitalist. An Angel Investor usually comes into the scene rather early. They help to kickstart the funding process with a relatively small loan (e.g. £25,000). Usually, angel investors are family, friends, or even close business associates. Their expected return on the investment is usually small, unlike VCs, who are investing primarily for the potential ROI. Angel investors usually invest in something because they believe in it, not because they think they’re going to get rich from it (although they might). 4) Public grants There are hundreds or perhaps even thousands of grants available for businesses. Often, these grants are aimed at assisting charitable organisations, or organisations that will bring economic improvement to a particular area or zone. There are two tricky elements to obtaining grant funding:   Knowing that a grant exists (i.e.findingit) Preparing the grant application which can be rather involved In these cases, we can certainly come to the rescue with our business funding service, which has a package specifically dedicated to obtaining business funding in the form of grants. 5) Bootstrapping “Bootstrapping” comes from the phrase “pull oneself up by the bootstraps”, which means to get oneself out of a situation through sheer grit and determination. The verb, “to bootstrap” is defined as getting oneself “into or out of a situation using existing resources”. This meaning has been extended, in the modern internet age, to mean “start-up (an internet-based business or another enterprise) with minimal financial resources”. Bootstrapping is most applicable to freelancers and other professionals who don’t need a lot of initial capital to get going. It can also work if you sell an idea before getting paid for it, then use the funds to purchase the materials needed to deliver that idea. If, however, your startup requires a lot of initial investment of funds which you don’t personally have, bootstrapping is not really an option for you. 6) Family and friends You can receive funding from family and friends to get your enterprise started. Technically, this would be considered “Angel Investment” although we’re speaking here more specifically of just a bit of help to get you going. As the old saying goes, “A friend in need is a friend indeed”. Asking friends for help comes in two shades: When you’re down and out and need a hand to get yourself up again. When you’re on the rise but need a small stimulus to get you motoring. In either case, you need to treat this “investment” from friends and family in the same way you would treat getting a loan from a bank. Take a professional attitude. Put a business plan together. (Although, you might need to angle the plan to be a little less pompous and more “funny” to impress your mates.) Don’t go to your friends with cap in hand and expect a handout. Put together something that impresses them and makes them want to get on board. Who knows, you might indeed attract the attention of someone who has a secret stash under the mattress, just waiting for an opportunity like this to pull it out! About author Julia Richards Our head of content, Julia has spent the past 20 years assisting entrepreneurs with all aspects of business launch and growth strategies in various industries around the globe.