Before registering your company, it is important to ensure that you pick the best legal structure that will work for you and your business. The legal structure that you adopt will have a huge impact on the type of activities your business can conduct so it’s necessary to get this issue right early on. It could impact the range of funding or financial investment you can seek, the amount of tax you have to pay to HM Revenue and Customs, and the amount of paperwork you have to complete.

There is no science to choosing a legal structure and each choice depends entirely on your individual circumstances and ambitions for your business.  Take a look at the different legal structures available below and see which one seems most appropriate for your business.  Read the profiles below and select the one which sounds most like you:

“I want to work by myself. There is no urgency to register my company. I want to start trading straight away.”  

“I want to create a social enterprise that is sustainable and works for the benefit of a community.  I also want to be able to apply for grants and other finance should I need it.” 

“I want to create a standard company with a traditional business structure. I do not want to be held personally responsible for the company’s debts. ”  

 “I would like to work in a partnership where our legal responsibilities and personal liabilities are shared.”   

 “I would like to work in a partnership where our legal responsibilities are shared but where we have no personal liability for the company’s debts.” 

 

A. Sole Trader

Being a sole trader is the easiest way to start a business. You don’t have to register with Companies house, taxes are relatively straight forward to deal with and you can keep all your profits. You can also take on staff – ‘sole trader’ means you’re responsible for the business, not that you have to work alone.

 Account and Management

 You must keep records showing your business income and expenses.

Legal obligations

 As a sole trader, you are personally liable for your business. Personal assets, such as your home may be at risk if your business runs into trouble.

 How to set up as sole trader

 You must register with HM Revenue & Customs (HMRC) as soon as you can after starting your business.

If you register later than 5 October in your business’ second tax year, you could be charged a penalty.

For example, if you start up as a sole trader during tax year 2012 to 2013, you must register before 5 October 2013.

Tax responsibilities

 You must:

• send a Self Assessment tax return every year
• pay Income Tax on the profits your business makes
• pay National Insurance

You will also have to register for VAT if you expect your business’ takings to be more than £77,000 a year.

 

 

B. Social Enterprise

Social enterprises can use a number of business structures.

If you want to set up a business that has social, charitable or community-based objectives, you can set up as a:

• limited company
• charity
• co-operative
• industrial and provident society
• community interest company

Community interest companies

Community interest companies can be limited by guarantee or limited by shares.

Running a community interest company is very similar to running a limited company but:

• the company’s money and equipment can only be used for its social objectives
• there are limits to the money it can pay to shareholders (if limited by shares)

Setting up a community interest company

You must apply to Companies House, as you would to set up a limited company. But for a community interest company, you must do 3 additional things:

• write a ‘community interest statement’ – this explains what your business plans to do
• create an ‘asset lock’- a legal promise that the company’s assets will only be used for its social objectives
• get your company approved by the community interest company regulator – your application will automatically be sent to them

The Department for Business, Innovation and Skills website has more information about how to set up a community interest company.

 

 

C. Private Limited Company

What is a limited company?

A limited company is an organisation that you can set up to run your business. It’s responsible in its own right for everything it does and its finances are separate to your personal finances.  Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits.

Who owns limited companies

Every limited company has ‘members’ (shareholders) – people or organisations who own shares in the company.

Directors are responsible for running the company. Directors often own shares, but they don’t have to.

Legal obligations

There are many legal responsibilities involved with being a director and running a limited company.

Most limited companies are ‘limited by shares’. This means that the company’s responsibilities for financial liabilities it can’t pay are limited to the value of company shares that haven’t been paid for.

For example, a company limited by shares issues 1,000 shares valued at £1 each when it’s set up. Its 2 shareholders own 250 shares each. If the company goes bust, the maximum it has to pay towards outstanding bills is £500 – the value of the 500 shares issued but not paid for.

Company directors aren’t personally responsible for debts the business can’t pay if it goes wrong, as long as they haven’t broken the law.

Other types of company

Most companies are private companies limited by shares. There are 3 other types.

• Private company limited by guarantee- Directors or shareholders financially back the organisation up to a specific amount if things go wrong.
• Private unlimited company- Directors or shareholders are liable for all debts if things go wrong.
• Public limited company- Companies where shares are traded publicly on a market, like the London Stock Exchange.

How to set up a limited company

You must set up the company with Companies House and let HM Revenue & Customs (HMRC) know when the company starts business activities.

Every financial year, the company must:

• put together statutory accounts
• send Companies House an annual return
• send HMRC a Company Tax Return

The company must register for VAT if you expect its takings to be more than £77,000 a year.

If you’re a director of a limited company, you must:

• fill in a Self Assessment tax return every year
• pay tax and National Insurance through the PAYE system if the company pays you a salary

 

D. Standard business partnership

In a business partnership, you and your business partner (or partners) personally share responsibility for your business. You can share all your business’ profits between the partners. Each partner pays tax on their share of the profits.

Account and Management

 You must keep records showing your business income and expenses.

Legal obligations

You’re personally responsible for your share of:

• any losses your business makes
• bills for things you buy for your business, like stock or equipment

If you don’t want to be personally responsible for a business’ losses, you can set up a limited partnership or limited liability partnership.

How to set up as a business partnership

You must choose a ‘nominated partner’. This is the partner who will be responsible for keeping business records and managing tax returns.

Registration for the nominated partner

The nominated partner must register the partnership with HM Revenue & Customs. When they do this, they will automatically register personally for Self Assessment.

 Registration for other partners

You must register for Self Assessment to pay your personal tax and National Insurance on your share of the partnership’s profit as soon as possible after you start trading. If you register the partnership or individual partners later than 5 October in your business’ second tax year, you could be charged a penalty.

For example, if you start a partnership or become a partner during tax year 2012 to 2013, you must register before 5 October 2013.

Tax responsibilities

 The nominated partner must:

• send a partnership Self Assessment tax return every year

All the partners must:

• send a personal Self Assessment tax return every year
• pay Income Tax on  their share of the partnership’s profits
• pay National Insurance

The partnership will also have to register for VAT if you expect its takings to be more than £77,000 a year.

 

E. Limited partnership and limited liability partnership

Limited partnerships

In limited partnerships, the liability for debts the business can’t pay is unequally shared by its partners:

• ‘General’ partners can be personally liable for all the partnerships’ debts
• ‘Limited’ partners are only liable up to the amount they initially invest in the  business

The Companies House website has information about how to set up a limited partnership.

Limited liability partnerships

In a limited liability partnership, the partners aren’t personally liable for debts the business can’t pay. Limited liability partnerships are most often set up by professional services firms, like solicitors or accountants.

The Companies House website has information about how to set up a limited liability partnership.

Tax responsibilities

Every year, the partnership must send a partnership Self Assessment tax return to HM Revenue & Customs (HMRC).

All the partners must:

• send a personal Self-Assessment tax return every year
• pay Income Tax on their share of the partnership’s profits
• pay National Insurance

You will also have to register the partnership for VAT if you expect your business’ takings to be more than £77,000 a year.

 

Source: www.gov.uk