Business Formation and Structuring

Starting a new business or restructuring an existing one is an exciting time, and choosing the right legal structure early will help achieve your long-term success. Our experienced Commercial Law team are here to help you choose the right business structure, understand the resulting legal obligations, and get your new venture off to the best possible start.

The legal structure of a business affects tax, profit distribution, ownership, management responsibilities, regulatory requirements and most importantly legal liability if anything goes wrong.  Choosing the structure that works best for you involves making choices on how you wish to run the business.

The simplest structures are lightest on paperwork and regulatory requirements, but are less scalable and and riskier for the business owner.  At the other end there is much more paperwork and regulation but greater flexibility to grow, change the ownership and protect the owners from risk.

Here are the most common ways that businesses are structured in the UK.

• Sole traders – the owner “is” the business so the trade, assets and liabilities are all in the owner’s name.  This is most common for the trades where the business is carried out by one person, although sole trader can employ staff.  This structure is lightest on paperwork as there are no company regulations to satisfy and business profits are taxed as the earnings of the owner.  The biggest downside is that the owner has unlimited liability for the liabilities and debts of the business if it all goes wrong and it may be more difficult to pass the business on once the owner is ready to sell.
• Partnerships – like a sole trader but there are several owners trading together as a partnership.  A partnership agreement is used to decide how much each partner owns and who will have which responsibility.  Partnerships are most common in professions such as lawyers, accountants, surveyors and doctors, often for reasons of privacy, but traditional partnerships are largely being replaced by Limited Liability Partnerships.  This is to address the same downside as for Sole Traders, namely the unlimited liability.
• Limited Liability Partnerships (or “LLPs”) – a cross between companies and traditional partnerships with some of the transparency and reporting responsibilities of companies in exchange for limiting the liability of partners for the debts of the business.
• Limited Companies – most commonly we mean companies limited by shares although other types are available.  The shareholders own the company but are completely separate entities from the company itself.  The company structure has the most regulation, including complying with the Companies Act, filing accounts and paperwork with Companies House and requiring an audit once above a certain size.  The upside is that the shareholders are not (usually) liable for the debts of the company and the separate legal structure allows for multiple owners and the ability for shares to be easily bought and sold without affecting the business of the company, unlike in a partnership.
• Public Limited Companies – these are limited companies whose shares are listed on a public stock exchange and can be freely traded.  The levels of regulation and costs involved mean this is only really suitable for larger, well-established companies.

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