Which Legal Structure Suits My Business? 

Read our FACTSHEET if you need further information before you decide which structure is right for your business. 

Entity Type Features Benefits Risks Our view 
Sole trader You do not have to do anything formally to set up as a sole trader, though don’t forget to let HMRC know that you are going to be self-employed. Sole Trader status describes a business which operates through an individual person, either in their own name or “trading as” a different brand. It is simple and you can get going straightaway without completing any particular formalities. Some people perceive that there will be less administration and associated costs but this is not necessarily so. You are trading in your own capacity and therefore you can be sued personally, in which case your private assets (your home, for example) could be at attacked by a creditor or disgruntled customer. It can also be more difficult to raise finance or pass the business on as a going concern. Because of the risk to your personal assets, trading as a sole trader is only really advisable where your business is very small and the risk of being sued is very low. Although there is some cost in setting up a company or LLP and there is a small amount of ongoing administration, the benefits mean it is usually worth it. 
Limited Company It is relatively straightforward to set up a limited company. You need to decide who will be the shareholders and directors (at least one of each), what name you would like the company to have and where its registered office will be. www.companieshouse.gov.uk sets out how to go about creating a company. A company has separate legal personality and can enter into contracts with customers and suppliers. This means that if there are any issues, it is the company rather than you that are sued. You can raise money by issuing shares in the company to other people and it can lend more credibility to the business. Running your business through a company can make it easier to pass it on when the original business owner wants to leave or retire. There are some formalities in running a company e.g. the need to file an annual return. However, there are many companies that offer help with this for relatively little cost. You will have to pay NI contributions for employees.  As well as offering the benefit of limited liability, a company gives a professional image. It also allows for the flexibility of bringing other people into the company either as shareholders or directors. NB If you do this, you should consider having a Shareholders Agreement to regulate your relationship. As well as setting out the ground rules between you, it can also include standards for operating the business. We can draft this for you or you can use our questionnaire (below) to record the key points.  
LLP An LLP consists of members (similar to shareholders) and designated members (similar to directors). These can also be set up through Companies House. LLP’s also have separate legal personality so have the same benefits as a company. Again, there are some formalities but there are people who can help you with those. If you opt for an LLP you have to have a Member’s Agreement, which is similar to a Shareholders Agreement. Whether you opt for an LLP or Limited Company will usually depend on how you wish to extract income from the business and should be something you consider with your accountant or financial adviser.  
Partnership These are similar to a sole trader in that the partners have personal liability. Some people perceive that partnerships have a level of good faith that makes them suitable for professional practices. Again, the partners have to enter into arrangements personally which can leave them exposed. Nowadays, if you wish to enter into a partnership type arrangement and as long as it suits you financially, an LLP can be a good option for the sorts of businesses that used to constitute themselves as partnerships. These have similar features to a traditional partnership agreement but the benefit of limited liability to protect the partner’s personal assets.  

There are other types of entities that may be suitable for special circumstances e.g. cooperatives, charities, social enterprise or CIC’s. If you think you may need one of this, please call us to discuss. 

Is it possible to convert from one type of structure to another once I have started trading? 

If you have already been trading in one format it may be beneficial to convert to another e.g. sole trader to limited company, partnership to LLP and it is possible to do this. You should first take advice from an accountant to ensure that will work for you. In each case, as well as the financial and practical changes you will need to make, we can supply you with the legal contract necessary to make the change and help you through the process. 

All parties should sign the document 

Aly Young 

Business Solicitor 

M:   07922 042 816 

E:     aly@ay-law.co.uk 

W:   www.aly-young-law.co.uk 

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