Most UK businesses operate as either sole traders or limited companies – but there are other structures available.
You might want to consider incorporating your business as a limited liability partnership (LLP). It’s a hybrid between a partnership and a limited company, and offers unique benefits to business partners keen to reduce their personal liability.
We’ll take a look at the different ways to structure your business and how you’d choose the right option for you.
Key features of sole-traders and partnerships
If you’re setting up your own business by yourself, the simplest way to begin is as a sole-trader. You keep all the profits, after you’ve paid tax on them and you’re personally responsible for any losses your business makes.
If you’re going into business with other people, you might structure your business as a partnership. All partners will be equally liable and responsible for the debts of the business and, in most cases, the conduct of each of the partners.
A partnership allows you flexibility in how you operate as a business. But there’s no cap on your personal liability, if the business finds itself in financial trouble. For example, if your business is sued, then the partners bear the burden of paying out in damages and legal fees if the case goes against you.
Why you might become a limited company
A limited company is its own legal entity, separate from its shareholders.
The benefit of this structure is that the shareholders of the company enjoy limited liability. The extent of your financial exposure is the value of your shares.
You’re protected from the liabilities and debts incurred by the company. If the business is sued, it’s the company that pays out, rather than the members in a personal capacity.
But there are some additional complexities with becoming a limited company. You’ll file formal documents at Companies House, such as your articles of association and accounts. These are available online for anybody to view.
From a tax perspective, the company will pay corporation tax and the shareholders pay income tax on the dividends they receive.
Limited liability partnerships – what you need to know
There’s another option that gives you the protection of a limited company, while retaining the organisational flexibility of a partnership. That’s the unique benefit of an LLP.
An LLP is a legal entity separate from its members. A partner won’t be personally responsible for the business’s debts and liabilities. You’re only liable for the amount you contribute into the LLP.
As with a general partnership, you’re free to agree how to share profits. You’ll decide who’s responsible for management and how decisions are made. You’ll have flexibility on when and how new partners are appointed, and the circumstances in which partners retire.
You’ll also have to file information with Companies House. There are fines in place for late filing of documents, so you’ll need to be clear what the requirements are and when the deadlines arise.
However, the LLP agreement is a private document and does not need to be filed; whereas the equivalent document for a limited company is publicly available.
An LLP is taxed as a partnership – no corporation tax, but you’ll pay income tax on your earnings, including your share of the profits.
Get in touch for specialist advice
Deciding how best to structure your business can be complicated. We hope you have found this a helpful starting point, but if you would like professional advice, please get in touch.
We’ll advise you on the specialist aspects such as tax implications, how to incorporate an LLP, and the financial reporting requirements.