Self employment – choosing the right legal structure
It is important that you choose the right structure when you start a business. There are different options and we, as solicitors, can give you an overview of the regulations, explain the requirements for setting up your business and advise on the suitable structure depending on your own circumstances.
There are 3 main structures:
– Sole traders: setting up as a sole trader is easy and simple, but you will be personally responsible for your business’s debts. You will also have some accounting responsibilities.
– Partnerships: A partnership is an option when 2 or more people decide to run a business together. You will share responsibility for the business’s debts. You also have accounting responsibilities.
– Limited companies: If you form a limited company, its finances are separate from your personal finances. On the other hand, you will have more reporting and management responsibilities. Whilst you can set up a company yourself, it is often recommended to get help from a professional, i.e. a solicitor or an accountant.
Sole trader: key features
The key features of a business operating as a sole trader include:
- No separate legal personality. There is no legal separation between the business and the affairs of a sole trader. A business operating as a sole trader cannot own assets in its own right, or grant security over them.
- Unlimited liability of participators. A sole trader is personally liable, without limit, for all of the debts and other liabilities of the business.
- Number of participators. There can only be one owner/manager in a business that is operated as a sole trader.
- No separation between management and ownership interest. There is no separation between the management and ownership of a sole trader business. The sole trader owns all the assets of the business personally and has full control over running the business. The sole trader makes all the decisions affecting the business.
- Minimal formation formalities and filing requirements. There are no formation formalities or filing requirements for setting up a sole trader business.
- Constitutional documents. There is no need for a business operating as a sole trader to adopt constitutional documents.
- Ongoing administration and filing requirements. A sole trader business is not required to file accounts or other documents with Companies House.
General partnership: key features
The key features of a business operating as a general partnership include:
- No legal personality. A general partnership does not have a legal personality separate from its partners. A general partnership cannot own assets in its own right, nor can it grant security over them.
- Unlimited liability of participators. Partners are jointly liable for the debts and obligations of the partnership business. Partners are also jointly and severally liable for the wrongful acts or omissions of their fellow partners in the ordinary course of the partnership business, or with the authority of the other partners.
- Number of participators. There must to be at least two participators in the business for a partnership to exist. There is no statutory upper limit on the number of partners in a general partnership. A partner in a partnership can be a company as well as an individual.
- No separation between management and ownership. The default position is that every partner has a right to participate in the management of a general partnership and participate equally in the partnership assets and profits.
- Minimal formation formalities and filing requirements. No legal formalities are required to set up a partnership and it is not necessary to register a general partnership with Companies House. Partners will, however, usually regulate their affairs by entering into a formal partnership agreement.
- Constitutional documents. There is no need for a business operating as a general partnership to adopt constitutional documents. The partners are not required to enter into a formal agreement to regulate the conduct of the business and their relationship as partners, although in practice most partnerships will do so.
- Ongoing administration and filing requirements. A general partnership is not required to file accounts or other documents with Companies House.
Private company limited by shares
A private company limited by shares differs in a number of respects from a public company. The key differences include:
- No minimum issued share capital. The nominal value of a private limited company does not have to exceed a specified amount. So, for example, it is possible (and common in practice) to incorporate a private company with a share capital comprising a single share with a low nominal value.
- No restriction on amount paid up on shares on issue. Unless its articles of association provide otherwise, a private company can issue shares on terms that the subscription price for the shares will be partly paid or nil paid on issue.
- Shares cannot be offered to the public. A private company is prohibited from offering its shares to the public.
- Officers. A private limited company must have at least one director. A private company is not required to have a company secretary, although it may choose to do so.
- Company name. Subject to certain statutory exceptions, the company’s name must include the word “limited” or “ltd”.
- Shareholder meetings and decisions. Provided it is not a traded company, a private company is not required to hold annual general meetings unless its articles of association provide otherwise. Decisions of the shareholders in a private company can be taken by way of a written resolution.
- Capital reductions, redemptions and share buybacks. Private companies have more flexibility in terms of procedure and source of funds for carrying out a reduction of capital, redemption of shares or share buyback. A private company can provide financial assistance for the purchase of its own shares.
We have a team of specialists who can provide guidance and advice on the structures available to your business and the best options in relation to tax and legal requirements . To speak to a member of our business team simply get in touch with us by using the contact form on this page, calling or emailing email@example.com