How To Choose The Right Business Structure?

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Published: April 21, 2022
Last Updated: February 13, 2025

A great and successful business is the outcome of a unique idea, sufficient capital, and countless efforts. A perfect combination of all three and other significant aspects takes a business to greater heights. The business idea itself can be the key factor to your business success, and conducting in-depth research will be the starting point that will help you answer how to start your business. Once you have decided on your business idea, you will have to focus on the steps required to start a business in the UK. The selection of a business structure is one of the critical steps in starting a business in the UK.

The type of business structure selected will impact the tax requirements along with the rules and regulations to be applied as per HMRC (Her Majesty’s Revenue and Customs). HMRC is the national taxation authority in the UK and is solely responsible for collecting all direct and indirect taxes. It ensures adherence to the taxation system and educates the common public about their tax payment duties. A business structure also clarifies the scope of the accounting and bookkeeping process. Whether in-house accounting services or accounting services outsourcing will be a feasible option, the right business structure is helpful. A smart business person knows that an appropriate structure will lead to clarity and transparency in the business operations.

Based on the incorporation status, there are two legal forms of entities in the UK, one is Unincorporated Legal Forms, and the other is Incorporated Legal Forms. The main distinguishing feature between these is that the Unincorporated Legal Forms have no separate legal entity, whereas the Incorporated Legal Forms do. The following entities come under these two forms:

1) Unincorporated Legal Forms

a) Sole Trader
b) Unincorporated Association
c) Partnership
d) Limited Partnership
e) Trust

2) Incorporated Legal Forms

a) Limited Company
b) Limited Liability Partnership (LLP)
c) Community Interest Company (CIC)
d) Charitable Incorporated Organisation (CIO)
e) Industrial and Provident Society
i) Co-operative Society (Co-op)
ii) Community Benefit Society (BenCom)
f) Financial Mutuals
i) Building Society
ii) Credit Union
iii) Friendly Society

There are few popular business forms that business owners adopt in the UK, irrespective of the type of incorporation. Let us understand each of these business entities in detail:

1. Sole trader
The most straightforward form of a business structure is a sole trader. A sole trader, also known as a sole proprietor, runs a business individually. They are entitled to enjoy all the profits but are also responsible for discharging all the liabilities. With less paperwork and minimal rules and regulations, it can be an excellent choice for individuals wanting to start small and grow from thereon.

A sole trader cannot enjoy the status of a separate legal entity. It means that the assets and liabilities of the business are not different from their assets and liabilities. In case of any discrepancy, the sole trader can be held personally liable to pay the debts raised from the business as a sole trader is the only master of the business. Thus, they enjoy ultimate control over business affairs. A sole trader must register for self-assessment with HMRC and fill in a tax return each year.

2. Partnership
It is a business structure in which two or more people come together to do business and share profits accordingly. A partnership can be of three types:

• Ordinary partnership: A partnership in which all the partners are responsible for the business. All the profits, debts, and liabilities are shared equally, and each partner must pay tax on their share. To set up an ordinary partnership, it must be registered with HMRC, and a nominated partner must be chosen.

• Limited partnership: A partnership with at least one general and one limited partner. All the partners are required to pay tax on their share of profits. However, the roles and responsibilities of general and limited partners are different. Setting up a limited partnership must be registered with the Companies House.

• Limited liability partnership: A partnership that has at least two designated members. Every partner pays tax on their share of profits but is not liable for the debts. Setting up an LLP must be registered with the Companies House.

A partnership can be a reliable option to commence business with friends, relatives, family members, etc. One substantial advantage of collaboration over sole trader is that the debts, liabilities, and financial obligations are divided among the partners. But with increased obligations, the degree of ultimate control is divided and is distributed among all the partners.

3. Company
A company is a legal person that is capable of buying and selling things on its own. It exists as a separate legal entity that can sue and be sued, implying that a company is separate from its owners. There are four standard types of company in the UK which are:

· Private limited company by shares: It exists as a legally separate entity from its directors and shareholders. The word “limited” refers to the limited liability of the shareholders. The liability of the shareholders is only limited to the value of shares.

· Private limited company by guarantee: It exists without any shareholders but is owned by guarantors who pay a guaranteed sum of money. The liability is only limited to the guaranteed amount. This type of business structure is mostly formed by non-profit organisations such as charitable organisations, sports clubs, workers’ co-operatives, etc.

· Public limited company: It is a company that offers shares to the general public. However, the liability is only limited to the value of shares held by the members. Also, a public limited company is listed on the stock exchange. Such a company must have at least two directors and a Company Secretary.

· Private unlimited company: This is a hybrid company in which the liability of the members or shareholders is unlimited in the event of liquidation of the company. These types of companies are not common in the UK.

Apart from the above four, there are two other forms of company in the UK:

• Community Interest Company (CIC): It is a type of company set up as a ‘social enterprise’ and is governed primarily by specific CIC legislation. It is also regulated in part by CA 2006. A CIC is limited either by guarantee or by shares. It uses its assets and profits for the benefit of the community.

• Unregistered Companies: It is a form of incorporated company that is not registered or formed under CA 2006 or any other public Act of Parliament. Unregistered Companies are a rare form of business formed under a Royal Charter or some private Acts of Parliament.

The tax requirements of a company are wider than sole traders and partnerships. However, the degree of control is minimised compared to partnerships because of the increased number of members or shareholders.

An entity is considered a business when it earns and distributes profits to its members. All the entity types discussed above are businesses with a primary objective to earn profits while offering their services. However, if someone wants to set up a not-for-profit organisation in the UK, there are numerous options. Unincorporated Associations and Trusts are the two not-for-profit organisations under Unincorporated Legal Forms. These two organisations don’t have a separate legal entity, meaning their members have unlimited personal liability against the organisation’s debts.

Under the Incorporated legal forms, there are Community Interest Companies (CIC), Charitable Incorporated Organisations (CIO), and Community Benefit Society (BenCom). These organisations are set up to serve the community. These are not-for-profit or social organisations. The liability of the members is limited to their interest in the organisation, meaning they enjoy the separate legal entity status. Any earnings from the organisation’s operations or finances are not distributed among the members but used for the community’s benefit.

Every business includes business processes like accounting and bookkeeping. Therefore, it is essential to decide whether going for accounting and bookkeeping outsourcing is required or if an in-house team would do good. But whether it is a small scale or a large-scale business, certain important factors need to be considered. A business structure will only help if you know how to initiate a business process, what factors are to be analysed, how to do proper research, etc. It might be more difficult for new business owners to have minimal knowledge about the business environment.