Morr & Co Solicitors

Choosing the right business structure

Our corporate solicitors can advise you on the best structure for setting up your business

Our corporate and commercial lawyers are highly experienced in advising clients on the legal issues that arise when setting up a business and in assisting with the administrative burden of the ongoing compliance requirements.

Setting up a Business

When a new business is established, a decision will need to be made on the appropriate legal structure. The main options are:

  • Sole trader
  • Partnership
  • Limited company
  • Limited Liability Partnership (LLP)

Each of these has advantages and disadvantages, largely in terms of the tax treatment and general liabilities of the business and its owners, along with the cost of administration. While there are exceptions in specific cases, the main differences are set out below.

Sole Trader

The features of a sole trader business are:

  • A sole trader must be a single individual. A second person joining in the business will automatically create a partnership.
  • The business has no separate legal identity.
  • Liability for the individual is unlimited and the individual is personally responsible for all debts, contracts and liabilities.
  • The individual is also personally responsible for income tax (and NICs) after allowable expenses (there is no separate tax on the profits of the "business").
  • Any property or assets in the business are owned by the individual personally.
  • There is no requirement to file any information publicly (other than information relating to ownership of assets that require registration such as property or registered IP).

Partnership

A partnership consists of two or more legal entities (which may be individuals or companies) carrying on a business in common with a view of profit.

  • The partnership has no separate legal identity.
  •  Liability for the partners is unlimited and they are jointly responsible for all debts, contracts and liabilities of the business.
  • The partnership must file a tax return, but the partners are personally responsible for their own tax.
  • Any property or assets in the business are owned by one or more of the partners personally (often on trust for the partnership).
  • Unless the partners agree otherwise, all profits and losses are shared equally by all the partners.
  • There is no requirement to file any information publicly (other than information relating to ownership of assets that require registration such as property or registered IP).
  • New partners may join and existing partners may leave, depending on any terms agreed between the partners.
  • If partners leave such that there is only one person in the partnership, then he will become a sole trader.

Limited Company (limited by shares or guarantee)

  • A company must have at least one member (which may be an individual or company) and at least one director. If there is only one director, it must be a natural person.
  • The company has its own legal identity, separate from the shareholders.
  • The liability of a member is generally limited to the nominal value of his shares or the amount of his guarantee. The company itself, and not its shareholders, is responsible for all debts, contracts and liabilities of the business.
  • The company must file a tax return and pay taxes.
  • The company generally owns any property or assets in the business.
  • The profits of the business generate by the company, belongs to the company. It may be distributed to the members by way of dividend. Members may also be employees of the company.
  • Information on the member/s and director/s of the company must be filed annually, as must accounts. This information is available to the public.
  • New members may join the business by granting them membership via the process set out in the articles and (if the company is limited by shares), issuing or transferring shares to them.
  • The company makes its own decisions (through its director/s), but the member/s may agree how the relations between them are to be governed.

Limited Liability Partnership (LLP)

  • An LLP consists of two or more legal entities (which may be individuals or companies), known as members.
  • The LLP has its own legal identity, separate from its members.
  • Liability for the members is generally limited to the capital they have invested in the business. The LLP itself, and not its members, is responsible for all debts, contracts and liabilities of the business.
  • The LLP must file a tax return, but generally the members are personally responsible for their own taxes.
  • The LLP may own any property or assets in the business.
  • Unless the members agree otherwise, all profits and losses are shared equally by all the members.
  • Information on the members of the LLP must be filed annually, as must accounts. This information is available to the public.
  • New members may be admitted or old members leave depending on any terms agreed between the members.
  • The LLP must have at least two Designated Members who perform certain duties in relation to the legal administration of an LLP (which would, for a company, be performed by the director/s). If there is only one Designated Member appointed at any time, all members are Designated Members.
  • If the membership falls to one, that member will cease to have limited liability.
  • The members may agree rules on how the LLP is to be run, decisions taken and profits shared.

The next steps

Once a business structure has been chosen, there are numerous other requirements which a new business will have to address, including:

How can we help?

Our corporate team has substantial experience in assisting new businesses and can offer advice on the appropriate structure to use in the particular circumstances. We can also help with the formalities of setting up companies and LLPs and with the preparation off partnership, LLP and shareholders agreements.

We are also highly experienced in helping foreign businesses establish a presence in the UK.

Greg Vincent

Greg Vincent

Partner, Head of Department

Corporate & Commercial