Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
This article discusses the key features, including the advantages and disadvantages of the four main business structures:
• Sole trader,
• General partnership,
• Limited company (limited by shares),
• Limited liability partnership (LLP).
Prior to choosing the best structure for your business, ensure that you research the relevant rules, regulations and legislation that apply to your business and applicable market. Check what type of insurance you will need, such as professional indemnity insurance or market-specific insurance (e.g. for the environmental or chemical industries) and speak to an insurance broker to ensure you are appropriately covered.
If you are selling your goods and/or services to consumers, become familiar with the Consumer Rights Act 2015, Consumer Protection from Unfair Trading Regulations 2008, the Consumer Contracts Regulations and the Distance Selling Regulations.
Next, create a business plan and find a recommended accountant. It is paramount that you obtain tax advice on the different business structures as the tax treatment is very different for companies compared to partnerships.
If you are taking on employees speak to an employment lawyer or other HR expert to check what is required of you as an employer.
The key features of a business operating as a sole trader are: the business has no separate legal personality, i.e. it cannot own assets or enter contracts in its business name and the owner must be an individual person.
The main advantages of a sole trader business are that there are very minimal formalities in setting it up and there are no initial or ongoing requirements to file accounts or other documents at Companies House.
The disadvantages are that you can only have one owner and that person alone is personally liable for the business debts or any liabilities (to the extent that they are not covered by his/her insurance).
A general partnership operates under the Partnership Act 1890 (the “Act”). However, a partnership agreement can be drafted to amend or refine the provisions under the Act in order to have more robust terms, e.g. on duration, division of profits, succession and/or exit or retirement.
The key features of a business operating as a general partnership are: the business has no separate legal personality – similar to a sole trader – and you need a minimum of two partners.
The main advantages of a general partnership are also similar to those of a sole trader, i.e. there are very minimal formalities in setting one up and there is no initial or ongoing requirement to file accounts or other documents at Companies House.
However, the main disadvantages are that partners are personally liable for their own acts or omissions plus are also jointly liable for the acts or omissions of any of the other partners. Trust is therefore key if you are entering a general partnership!
Point to note: a written partnership agreement can set out a management structure, limiting partners acting on their own freewill and include provisions whereby ‘managing partners’ are responsible for deciding whether or not to enter contracts. Partnership agreements tend to be common in family businesses that evolve generationally or in businesses where there are multiple partners, new partners join or existing partners leave on more than an occasional basis.
A company limited by shares is governed by the Companies Act 2006 (the “CA 2006”). The CA 2006 covers every aspect of forming and running a limited company, including directors’ duties, people with significant control (“PSC”) regime, shareholders’ rights, changes to share structure etc.
The key features of a company limited by shares are: it has separate legal personality, i.e. it can own assets and enter contracts in its own company name; the liability of each shareholder is limited, usually to the amount which mains unpaid on each shareholder’s shares; the company can be owned by a single shareholder/director; and the company must have Articles of Association, a public document setting out the basic structure and management of the company, which must be filed at Companies House.
The main advantages of a company limited by shares are: the limited liability of the owners for the debts and liabilities of the business and the separation of management (decision-making) and ownership (e.g. investor shareholders).
The main disadvantages are the initial and ongoing annual filing requirements at Companies House and ongoing fees plus the statutory procedures that must be followed under the CA 2006 with regard to changes in share capital, organisation or constitution which can be administratively burdensome.
The legislation relating to LLPs has many parallels with the CA 2006. The key pieces of legislation are the Limited Liability Partnerships Act 2000 (the “LLPA 2000”) and 2 sets of regulations – (a) the Limited Liability Partnerships Regulations 2001 (the “LLPRs 2001”); and (b) the Limited Liability Partnerships Regulations 2009 (the “LLPRs 2009”), incorporating parts of the Companies Acts 1985 and 2006, respectively. The LLPRs 2001 and 2009 cover areas such as roles of members and designated members, the PSC regime, and ongoing filing requirements.
The key features of an LLP are that it has separate legal personality; it must have a minimum of two members, who can be individuals or a company; it has no share capital; and there is no requirement for members to contribute capital to the LLP.
The main advantages of an LLP are the limited liability of the owners for the debts and liabilities of the business and no requirement for constitutional documents.
The main disadvantages of an LLP are the initial and ongoing filing requirements at Companies House, however these are less burdensome than for companies limited by shares due to not having a share capital.
An LLP is similar to a general partnership in terms of the flexibility of its governance. An LLP is usually governed by a written Limited Liability Partnership Agreement, a private agreement containing the rights and obligations of the members to each other and toward the business.
LLPs are usually the favoured option for professional services, such as accountants, solicitors, architects and surveyors.
Whether you are planning to set up your new business or are restructuring your business, e.g. to incentivise employees or bring in new investment, we can help you to understand the different business structures and options, to choose the option that is right for you and that will help develop or expand your business.
If you would like more information about business structures or would like to discuss a new or existing business plan, please email us at enquiries@orrlitchfield.com, complete an Enquiry Form or call us.
