UK Yankee News

There are many forms of organization that a business can take in the UK. These are in two groups. The most common are marked with (*) and are briefly explained.

Limited Companies Private Limited Company * Public Limited Company Private Unlimited Companies Work Co-operative Limited Liability Partnership

Non-Limited Companies Sole Trader* Partnerships* Franchise

Non-Limited Companies:

~Sole Trader
The simplest and least complicated business form, this type of operation has minimal start-up costs. One can also begin trading right away, as long as no special licenses are needed for the chosen type of business.

The sole trader has complete control over the management of the business and receives all of the profits. However, the business income is taxed as personal income and one must register immediately (within 3 months) as self-employed with Inland Revenue for Self Assessment and NICs (National Insurance Contributions) must be paid by the individual.

Advantages: All profits belong to the owner. Owner is the boss. Losses can be offset against tax on other income. Independence. Easy to setup and run.

Disadvantages: Owner is liable for all business debts, to be taken from any/all assets available. There is no income when you are ill or go on holiday, and the business would likely close down in case of owner’s death. Lack of support.

~Partnership – unlimited liability
Two to twenty people may join in a partnership. They are relatively easy to setup. Similarly to sole traders, each partner pays income tax on their share of the profits made, and are responsible for NICs. All partners are responsible for all business debts. It is best to set up a legal agreement between partners to set out rights and obligations. Partnerships are dissolved when one partner dies, resigns, or declares bankruptcy, unless another partner buys out their share.

Advantages: Shared management and responsibility. Shared financial resources.

Disadvantages: Legal issues involved. Reponsibility to partners. Unlimited debt liability. Shared profits. Shared decision making.


Limited Liability Formations

~LLP (Limited Liability Partnerships)
This form of partnership is similar to the other, the main differences being that debt liabilities are limited, only up to a certain amount, and that they are incorporated with Companies House, and must comply with Companies House regulations for such companies, such as submitting annual returns and accounts, as well as other restrictions. Partners are still self-employed and again must register with Inland Revenue.

Advantages: Shared management and responsibility. Shared financial resources. Limited debt liability. Easy to setup and run.

Disadvantages: Legal agreements. Increased administration with Companies House details. Some debt liability. Shared profits. Shared decision-making.

~Private Limited Companies
A limited company is legally a separate being. The directors are not personally liable for the company’s debts, unless assets were secured as collateral or invested in the business. Setup costs are higher because of the requirements to register with Companies House before it can trade, and must submit the required documentation and fees, and annual accounts and returns must be filed annually. The company pays Corporation tax to Inland Revenue on its taxable profits, and directors are employees, therefore the company must register as an employer and adhere to the required PAYE and NIC withholding schemes.

Registering a company is not entirely straightforward, it involves complicated paperwork, Articles of Memorandum and other such documents, so while registering a company yourself would only cost £25, your application could be rejected if it’s not done properly. Having this done by an firm for you is relatively inexpensive, they will take care of nearly everything for a fee of around £100-250. The wait for everything to be done can range up to a few days or a week or more, depending on the avenue and/or arrangements you have made with the firm. One option to speed things up is to buy a company “off of the shelf”, which has already been formed and registered, though you sacrifice your choice in company name. There must be one director and one secretary, however a one member company is possible. Management is controlled by the board of directors, and are each responsible for that management. Capital is raised by the private sale of shares, and dividends paid to shareholders.

Advantages: Limited debt liability, you only lose what you’ve put into the business. Well known legal basis for operation. Easy to sell your share to someone else.

Disadvantages: The administration of submitting returns and accounts, which can be read by others. Payroll administration. Share in decision making with any other directors.

Summary:
In deciding the form that your business should take, seek the counsel of a solicitor (attorney), accountant, or business advisor and consider the options carefully. They will be able to advise on all of the requirements of each option in areas of taxation, VAT (value added tax, like sales tax) and any licensing requirements for your chosen business. This article is only a guide to give you an idea of what is involved.