How to start a business: business structure and registration

Next in our series on how to start a business, we look at the right business structure choice for you, as well as how to register your business.

In part one of our series on how to start a business, we looked at some of the basics of the evaluating and planning stages. As we saw, there are many considerations to bear in mind in these early stages. Many of these decisions will affect the business structure you might choose.

Your next steps focus on choosing the right way of organising your business, as well as how to register it. These are both decisions that can shape how your company functions going forward. We have full details on both points in this second part of our series.

What are the different business structures?

Perhaps the biggest decision you’ll need to make early on in forming a company is what type of structure it’s going to take. There are several different routes to choose from, each with its own pros and cons, as well as implications for things like tax and liability. 

For the sake of ease, we’ll cover four of the most common types of business structure. There are other options available, but these are often more complex. A public limited company (PLC), for example, requires owners to raise significant amounts of funding on the stock exchange. The ones outlined below can be set up and registered with relative ease:

1) Sole trader

Many freelancers and other people who are self-employed register as sole traders. It’s pretty straightforward to get started with this method, as you only need to register with HMRC. From there, you can keep all of the profits you make, after you’ve paid tax and national insurance (NI). 

On the subject of tax, you’ll need to keep a record of all of your business’s sales and expenses. Each year, you’ll then need to fill out your self-assessment tax form and pay what you owe in tax and NI. As well as being responsible for your tax, you’re also personally liable for any debts or legal action against you.

Who it’s for

For those who just want to get started and don’t have lots of cash behind them, registering as a sole trader is a good option. It’s the route often chosen by self-employed professionals such as photographers, freelance copywriters, independent hairdressers, and similar.

Pros

• It’s quick, easy and inexpensive for you to set up and maintain.
• You maintain full control over decisions. 
• Business expenses, such as travel and equipment, are tax-deductible. 
• It’s flexible, as you don’t need partner or shareholder permission to act.

Cons

• You assume full liability for any debt or legal issues that arise. 
• You may end up paying more in tax when you start making more.
• Some bigger companies won’t deal with sole traders.

2) Partnership

As the name suggests, a partnership consists of two or more entities (a person or a limited company) that share business responsibilities and profits. Each partner is considered self-employed and pays tax on their share of the profits. Each must also register with HMRC, although the ‘nominated partner’ is responsible for dealing with the annual tax return. 

Partnerships are common when two individuals work closely to build a business. However, there needs to be an agreement on how things like profits, ownerships, and liability are shared. In a standard partnership, all partners are responsible for debts owed by the business, no matter which individual has amassed them.

Who it’s for

For those who want to share the management and risk of running a business, a partnership is a good choice. However, trust is an essential aspect of deciding who to partner with. Many couples, for example, will choose this structure when forming a company together. 

Professionals with shared experience often form partnerships, as they can make decisions together while sharing the profits. Doctors, dentists, and solicitors will sometimes use this structure, although a limited liability partnership (LLP, see below), is more common.

Pros

• As with a sole-trader, the costs for setting up and maintaining a partnership are quite low, and it’s relatively hassle-free. 
• Financial reporting is straightforward, as each partner is classed as self-employed. 
• If funds are needed to progress the business, responsibility is shared.

Cons

• Liability for debt and legal issues are still tied to the personal finances of each partner. 
• When you start earning more, you’ll often pay more in tax than with other options. 
• It can be difficult to bring things to an end with multiple partners.

3) Limited liability partnership (LLP)

With this company structure, the problem of unlimited liability for each partner is addressed. On the surface, much of the same rules apply as with a regular partnership. Each partner has to register with HMRC as self-employed. Similarly, there needs to be two ‘designated members’ who take responsibility for filing accounts. 

However, the partners’ assets have greater protection. The liability for debt is limited depending on how much each partner has invested or guaranteed during the initial setup. With this protection, partners must register with Companies House and disclose their income publically each year.

Who it’s for

An LLP is much like a hybrid between a partnership and a private limited company (Ltd, see below). As such, it makes them a good choice for those offering professional services who are hoping to eventually grow to attract other professionals. Those in the financial services and law industries, for example, often choose this structure thanks to the added protection.

Pros

• LLPs offer a great deal of flexibility. 
• Combines the advantages of a partnership with those of an Ltd company. 
• A members’ agreement outlines what share of the profit each partner receives.

Cons

• Partners must disclose their income. 
• Tax advantages aren’t as beneficial as those that come with an Ltd.

4) Private limited company (Ltd)

A private limited company is incorporated and limited by shares. Essentially, this means that it is registered with Companies House, and therefore a legal entity in its own right. For the owners of the company, this means that they are not responsible for any of the company debts beyond the value of the shares they hold. 

This type of business structure requires at least one registered director, as well as one shareholder. However, one person can act as both. It costs money to register your company, and you’ll need to provide more documents than with the other methods.

Who it’s for

For those looking to lend credibility to their business, while at the same time controlling your exposure to risk, an Ltd is a sensible choice. Not only does it mean that your personal assets are protected, but also that you can find it easier to borrow money if you need to. 

In terms of tax, things can work out more favourably for limited companies. They pay corporation tax on profits, which often means the owners benefit compared to other structures. However, there are more regulatory and administrative demands to consider, and all accounts are placed in the public domain.

Pros

• With an Ltd, your personal financial and legal risks are minimised. 
• Corporate clients are more likely to work with you. 
• If you’re earning high amounts, you’ll potentially pay less tax.

Cons

• It’s more complicated and expensive to set up and maintain. 
• You’ll have to publish your annual accounts, which can be viewed by anyone.

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How to register your business

Hopefully, you’re now familiar with your options when it comes to business structure. Depending on which one you choose, you’ll have to register in slightly different ways. There are similarities and differences between the four structures we outlined above. Rather than giving full details, we’ve highlighted the main points for each type of company:

Sole trader

To register as a sole trader, you’ll need to do the following:

• Register with HMRC for tax self-assessment
• Start a record of your sales and expenses 
• Complete a tax return every year in which you trade
• Pay Income Tax and NI on your earnings
• If your turnover is over £85,000, you’ll need to register for VAT

Partnership

With a partnership, there is some extra information that you’ll need, including: 

• Choose a name for your partnership
• Choose a ‘nominated partner’ to manage tax returns and keep records
• Register your partnership with HMRC (and as a ‘nominated partner’ if that’s the case) 
• Register separately as an individual and pay Income Tax and NI on your earnings
• If your turnover is over £85,000, you’ll need to register for VAT

LLP

Things start to get a little more complex when it comes to registering an LLP, and you’ll need to provide extra information. Steps include: 

• Choose a name for your LLP 
• Register an address, which will be publically available 
• Assign at least two people as ‘designated members’. They are responsible for registering the business for tax self-assessment. 
• Create an LLP agreement which outlines how you’ll run the company and divide profits and responsibility.
• Register the LLP with Companies House

Ltd

For setting up a private limited company, you’ll need to follow many of the same steps as with an LLP. However, there are also plenty of additional ones, making this the more complicated type of company to register: 

• Choose a name for your Ltd 
• Choose  a director/directors
• Nominate at least one shareholder or guarantor. This person can be a director. You also need to identify those shareholders who own more than 25% of the shares. 
• Prepare a memorandum of association. This is a signed agreement from all of the initial shareholders agreeing that they want to form the company. 
• Prepare articles of association. These are the written rules that your company shareholders and directors agree to. 
• Check the types of records and accounts you’ll need to keep. 
• Register an official address and choose a Standard Industrial Classification (SIC) code.
• Register your Ltd with Companies House.

Final Thoughts 

For those who are looking to start their own company, there are many different options available when it comes to business structure. The four that we’ve covered here are the most common, and for good reason. Each is relatively straightforward to set up and maintain, although an LLP or Ltd is a little more complicated. 

Depending on the sector you’re entering and your business plan, you should be able to determine which structure is best suited to your current goals and ambitions.