In the UK, businesses primarily operate under three legal structures: Sole Trader, Partnership, and Limited Company. Each structure comes with its unique set of responsibilities.
This article provides an overview of the legal structures, legal requirements, and costs to register a business.
Legal structures of a business
When you decide to start a business, one of the first decisions you’ll face is choosing the appropriate legal structure. This choice will affect your tax, paperwork, and personal liability, so it’s important to understand each option.
The three most common legal structures in the UK are:
This is the simplest form of business structure, suitable for an individual running a business alone.
Liability: Sole traders have unlimited liability, meaning your personal assets could be at risk if your business incurs debt.
Taxation: You need to register for self-assessment with HMRC and file tax returns annually, paying income tax on your business profits.
Legal documentation: The administrative burden is relatively low, but depending on your business, you may require specific licenses or permits, for example, a license to play music or sell food.
Decision-making: Sole traders have complete control over their business decisions without the need to consult with others.
This structure is used when two or more people want to run a business together.
Liability: In a partnership, each partner shares responsibility for the business’s debts, and profits are shared between partners.
Taxation: Each partner is taxed through self-assessment on their share of the profits. The ‘nominated partner’ must also submit a partnership return to HMRC.
Partnership Agreements: It’s highly advisable to have a formal Partnership Agreement in place. This legal document outlines how profits are shared, the responsibilities of each partner, and the procedures for resolving disputes, adding or removing partners, and dissolving the partnership. While not legally required, a Partnership Agreement can provide clarity and prevent conflicts.
Decision-making: Business decisions are typically made jointly unless the Partnership Agreement states otherwise.
A limited company is a separate legal entity from its owners. This means the company’s finances are separate from the personal finances of their owners.
Shareholders may run the company or appoint directors to manage it on their behalf. Registering a limited company involves more complex reporting and management responsibilities.
Liability: Shareholders’ liability is limited to their investment in the company, protecting personal assets.
Taxation: Limited companies pay corporation tax on profits. Directors, as employees, handle their taxes through PAYE. Shareholders who are not employed by the company are subject to income tax on dividends. We advise that you talk to a seasoned accountant to help with tax queries.
Legal documentation: It is mandatory to register with Companies House and submit annual accounts.
Shareholders’ Agreements: Similar to a Partnership Agreement, a Shareholders’ Agreement is strongly advised. It governs the relationship between shareholders and outlines the management structure of the business, share ownership, and protective provisions for all shareholders.
Company structure: Businesses are typically run by directors and owned by shareholders. Directors have legal duties to act in the company’s best interest, maintain accurate records, and fulfill reporting obligations.
How much does it cost to register a business?
The cost of registering a business varies based on the type of business structure:
Sole Trader: Registering as a sole trader with HMRC is free. However, you may incur costs related to setting up your business, such as obtaining licenses or insurance.
Partnership: Registering a partnership with HMRC is also free, but like sole traders, you may have other setup costs.
Limited Company: To register a limited company, there is a fee to Companies House. Online registration costs £12 and is usually processed within 24 hours. Postal applications cost £40 and take 8 to 10 days. Same-day registration is available for a cost of £100, for applications made by 3pm.
Do you legally have to register a business?
Every new business in the UK is subject to mandatory registration with HMRC.
Sole Trader: You need to register with HMRC for self-assessment as soon as you start trading as a sole trader. This is so you can pay income tax on your profits and National Insurance.
Partnership: The ‘nominated partner’ has to register the partnership with HMRC for self-assessment. Each partner must also register individually.
Limited Company: If you form a limited company, you must register it with Companies House. This registration is a legal requirement and is separate from tax registration with HMRC.
What other legal obligations do I have?
As a business owner, you’ll have several legal obligations after registration. There are legal documents and internal processes that are required to ensure that your business is legally compliant; such as contracts, agreements, and how you handle personal data.
Our legal experts can help with all matters relating to corporate, commercial, property, and employment law.
We recommend instructing a tax advisor who can guide you through your accounts and tax obligations.
Please speak to us today if you need legal advice:
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