In any jurisdiction, a legal entity acts as the foundation of a business. The same is true for the United Kingdom. Thus, understanding different structures and picking the most appropriate one is key for your organization. The corporate structure of your venture indicates the type of the company, the number of members involved, the extent of liability and protection, and so on.
There are various types of business structures in the UK, each offering multiple advantages, such as flexibility in taxation and anonymity. However, before we seize these advantages, we must first understand the different corporate structures in the UK, with this blog.
What are the Types of Company Structures in the UK?
Before proceeding with your UK company formation, here is what you need to know about the types of entities available to you:
Sole Proprietorship
Sole traders or sole proprietorships are one of the most popular and straightforward forms of UK business entities. The name “sole” suggests it is an individual-run company. It demands less business formality, complete foreign ownership, and no upper limit on profits. You bear personal responsibility for all debts accrued in your business.
As you are a self-employed person, you would not have to pay UK corporation tax (CT). But you will need to register with His Majesty's Revenue and Customs (HMRC) for self-assessment and submit tax returns.
Limited Company
A Limited Company is another type of business entity in the UK. It functions as a separate entity from its owners and protects its members and shareholders. To establish a limited company, you must appoint a director and a shareholder.
The shareholders in a limited company are only liable for the amount of their investment in case of insolvency or losses. Essentially, a limited company business structure in the UK safeguards your assets from any business failure or debts.
Limited companies are of three types:
- Private Company Limited by Shares- It is suitable for businesses aiming to make a profit. Here, shareholders are only liable up to the amount they have invested in the company's share capital, which may include offshore IBC money.
- Private Company Limited by Guarantee- Unlike regular businesses with shareholders aiming for profit, a private limited company by guarantee has members who act as "guarantors," promising to pay if the company incurs debt. This shields personal finances and ensures all earnings support the cause. Political parties, charities, and clubs use this type of structure so that any extra money they make can be put back into their work, rather than being given out as profit to their members.
- Public Limited Company (PLC)- A Public Limited Company sells parts of the company (shares) to the public to raise capital. People who buy shares become shareholders, or part-owners. They make money if the company does well, either through a share of the profits or by selling their shares for more.
However, establishing this structure requires more paperwork than a sole proprietorship. Getting in touch with a business expert is a viable option.
Partnership
A partnership is another corporate structure in the UK. It allows two or more people to share ownership, profits, assets, and liabilities of their businesses. It is relatively simple to set up.
While opting for this structure, you must have a partnership agreement. Like a sole proprietorship, in a partnership, each partner is personally liable for the business’s debts. Under this structure, a partner must file their self-assessment tax return.
There are three types of partnerships in the UK, namely,
- General Partnership - A general partnership, often referred to as an ordinary partnership, consists of two or more members who are equally responsible for the profits, debts, and liabilities. Here, the partners can engage in businesses such as trading or any other profit-making activity.
- Limited Partnership - A limited partnership (LP) has at least two partners, namely a general partner and a limited partner.
- General partners run the business and have unlimited liability.
- Limited partners contribute capital, have limited liability, and cannot manage the business.
- Limited Liability Partnership - In this business structure, members are only responsible for their own investments or obligations, not for the debts or negligence of other members.
Overseas Company
This type of structure is headquartered outside the UK but has a physical presence or business within the UK, like a subsidiary or branch. Meanwhile, these companies need to register with the UK’s Registrar of Companies if they engage in business operations within the UK.
Things to Consider While Selecting a Legal Structure in the UK
If you are considering any one of the above-mentioned UK business entities, then these are the points to consider:
- The liabilities attached to each structure
- Tax implications for different entities
- The cost and time for setup
- Funding and investment
- Your long-term business goals
- Your risk tolerance
- Are you going into business alone or with others?
Additionally, each structure has its own features, pros, and cons. Therefore, you should carefully consider your business model, risk tolerance, and long-term goals before making an informed decision. We at Business Setup Worldwide are familiar with the process of setting up a company in the UK, and can help you select a suitable UK business structure. Along with that, we also assist you in opening a UK bank account. For more information, feel free to contact us.
