Once you’ve decided to start a small business, you need to pick a business structure. The type of structure you choose can affect four major areas:
How much you pay in taxes
Whether or not you can raise money
Which paperwork you need to file
Your personal liability
You don’t need to have the future of your business completely mapped out years before making a decision; the business structure you choose now may change in the future. With that said, you do want to be mindful of your choice, and you should consult with legal and financial professionals if you need to make a change down the line to avoid any unintended consequences.
There are several types of business structures in the UK. Here are the four most common.
Limited Liability Partnership
Operating as a sole trader is the most common type of business structure. This is a solid choice for most new business owners who are just getting their feet wet or intentionally keeping things small. As a sole trader, you run the business and are responsible for all liabilities.
A Partnership consists of two or more people who share in the profits, losses, risks and benefits of a small business. Partnerships are unincorporated, with the partners considered to be self-employed.
A Limited Liability Partnership, or an LLP, is similar to a partnership, but each partner’s liability is limited to the capital they’ve invested in the business. The responsibilities and profit share of each partner should be established in an LLP agreement at the outset of operations.
A Limited Company is owned by shareholders and run by a board of directors. A Limited Company is responsible for its own liabilities, with any profits going directly to the company before being distributed as dividends to the shareholders.
You can browse the GOV.UK site to find guidance for setting up a small business, as well as information about the tax applications of each model. You should also consult with tax, business and financial professionals about your options.