Starting a business: what type?

There are a number of different ways to set up a business, depending on what kind of work you do, how many people are involved, and so on. Before starting your business, you should take some time to consider what type of business structure will suit you best. Here’s a short guide to different types of businesses, to help you work out which is best for you.

Sole trader

The easiest way to start a business is as a sole trader or freelancer. Make sure you register with HMRC within three months of starting to work in this way, or you could get a fine.

Being a sole trader means there’s only one person running the company and no legal distinction between the owner and the business. You’re personally responsible for the debts and liabilities of your business. As a sole trader, you report your business income and expenses on your own personal self-assessment income tax form.

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If you want to run your business with other people, you can form a partnership. The partners and partnership must register with HMRC.

Like sole traders, partners report the gains and losses of the business on their own personal income tax forms. Partners are jointly and severally responsible for all the debts and obligations of the business, so partners’ personal assets can be claimed to pay off partnership debts.

If one of the partners leaves the partnership, the remaining partners become liable for the entire debt of the partnership. If a partner dies, resigns or goes bankrupt, the partnership will be dissolved. Partnerships may also have limited and/or sleeping partners, who invest in the partnership but do not work within it.

Because of all the different implications of these relationships and possible scenarios, it is best to have a partnership agreement from the outset.

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Limited liability partnership

An LLP combines the flexibility of a partnership with the benefits of limited liability – one partner is not liable for another partner’s negligence or misconduct. Unlike a partnership, the personal assets of LLP members are generally not at risk, except in particular circumstances where one member can be said to have assumed a personal responsibility that was reasonably relied upon by a third party to that third party's detriment.

LLP is used by professional firms such as solicitors and consultancies, and may be suitable for design firms and other similar companies.

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Private limited company

A private limited company is the most popular business form. Unlike a sole proprietorship, it separates the business from the owners’ personal affairs. It is therefore often the best way to start a business or the natural next step in development for a sole trader.

A limited company is owned by its shareholders and run by at least one director. This system has proved flexible and efficient for a wide range of businesses.

A company is set up by incorporating it at Companies House with articles of association governing how the business operates. It is advisable to draft a shareholders’ agreement to specify how the shareholders intend the business to be run.

While it is simple to set up a standard company, it is sensible to get the advice of an accountant and/or solicitor on whether this is the right form of business for you and on the relevant documentation.

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Public limited company (PLC)

A public limited company is a limited company that sells shares to the public – a useful way of raising capital. It can be either unlisted or listed on the stock exchange. To trade on the stock market, a company must have a minimum share capital of at least £50,000. A public limited company also needs to have at least two shareholders in the company, at least two directors in the company and a qualified company secretary. It requires a trading certificate from Companies House before starting business.

You should be aware that, as a public limited company, your accounts must be in the public domain. 

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Community interest company (CIC)

CICs are limited companies designed for social enterprises that want to use their profits for the benefit of the community and not purely private advantage. Registration as a CIC has to be approved by the regulator. The two main features are the asset lock and the Community Interest Statement and Report. Assets and profits must be permanently retained within the CIC, and used solely for community benefit, or transferred to another organisation which itself has an asset lock, such as a charity or another CIC. The Community Interest Statement certifies that the company is formed to serve the community rather than private profit motives and must describe the activities of the CIC. A CIC may be limited by shares or guarantee.

CICs cannot register as charities. A registered charity can, however, convert into a CIC if the Charity Commission gives consent, but it will lose its charitable status including tax advantages.

CICs have access to grants and loans from Community Development Finance Institutions. However, they tend to finance themselves primarily through issuing shares, acquiring loans and issuing loans secured on company assets.

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Company limited by guarantee

This type of business is widely used for charities, clubs, societies, community projects and other similar bodies and is generally not-for-profit. (An unusual guarantee company is Network Rail, which runs the railway network.)

A company limited by guarantee is similar to a private company. It does not sell shares but is guaranteed by its members, typically for £1 each. A guarantee company therefore has no share capital, though it can borrow money.

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Co-operatives are businesses that benefit their members, who can be employees, customers, or people in the local community. There are creative co-ops across the UK, from web designers to theatre groups. Since co-op members are also the owners, they make the decisions about every aspect of their business, and need to develop effective ways of working together. Any profits generated by a co-op will usually be shared among the members, rather than distributed to external shareholders. Legal forms a co-operative might take include an Industrial and Provident Society, a Company Limited by Guarantee/Shares and a Community Interest Company (CIC). Some local authorities support Co-operative Development Agencies, which provide help with starting a co-op. 

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