14th November 2023
14th November 2023
Before running a business in the UK, one must ensure that the business is legitimately and legally recognised by the relevant authorities. This process is also very necessary because of the varying types of business structures that exist and the differences in their constitutions. As such, beyond the decision to start a business, an entrepreneur should understand the different legal structures of his or her business, the implications of the chosen structure, and how to legitimately register the newly formed business. The recognised types of business structures in the UK are:
The aim of this guide is to explain the differences between the different business strictures listed and outline how they should be formed, registered and/or constituted so that they are legitimate.
A sole-trader business (or sole proprietor) venture where the owner of the business owns it as a self-employed person. In this business structure, the sole-trader will be personally liable for all the debts of the business. This means that there is no distinction between the business's assets and the sole-trader's personal assets. If the business fails, the sole-trader's personal assets may also be used to cover any debts.
There are no formal steps needed for one to set up a sole-trader business except that the sole-trader is required to register with the HM Revenue and Customs (HMRC) for tax purposes. This makes the sole-trader business the easiest to set up and start running. Additionally, the sole-trader is only required to register for Value Added Tax (VAT) if the business turnover exceeds the limit of £85,000 annually. There is no specific requirement for the name of the business. The entrepreneur can use their name (e.g John Smith) to register with the HMRC as a self employed person. The only restriction regarding the name of the business is that it must not end with any suffix that portrays it as a corporate entity (i.e. "Ltd", "Limited", "Plc" or "LLP"). Additionally, the chosen business name cannot be offensive or vulgar.
Where the proposed business name will include a sensitive word, e.g., "accredited,", then permission must be granted by the Department for Business and Trade (DBT).
Registration of a sole-trader business is complete once the owner registers with the HMRC. There is also a requirement to have earned at least £1000 in a tax year before one can register a sole-trader business.
To further protect the business name chosen, the name of the sole-trader business should be registered as a trade mark.
A company, is a type of business that has a separate legal personality from its founders and limits the liability of its members to the extent of their share contribution. The ability of the members/founders to limit the extent of their liability is a major advantage of running a business as a limited company.
Separate legal personality means that the company is treated as being its own person in the eyes of the law. In practice, that means that a company can enter into a transaction or a contract as a party in and of itself, or can be sued for any legal breaches.
A private limited company is a company that is not permitted to publicly trade on the stock markets. In other words, the members of the public do not own shares in a private company and only the members/shareholders listed on the company's official documents are owners of the company. Additionally, a private company cannot offer its shares to members of the public.
Requirements
To create a private limited company, there are formalities that must be followed before the company can be recognised as duly registered and ready to start trading. If none of the required formalities are followed, the company will not be legally constituted.
To create a private limited company, the following documents should be created:
The company must also have a trading address from which it will conduct business. This is the address that will be on its official documents as well. The company must then choose people who will act as its directors. The directors will be in charge of day-to-day management of the company.
A private limited company can also be a one-man company. This means that it can have one person who would be the sole shareholder (i.e. own all the shares in the company) and also the sole director of the company. The requirements for setting up the company are the same regardless of whether it is a one-man company or not.
Registration
Upon completion of the required documents for the creation of the company, they can be submitted either online electronically, or physically by post. If the documents are being submitted electronically, it should be done via the Web Incorporation Service of the Companies House. Conversely, if the documents will be submitted physically, they should be sent to the Registrar of companies at the Companies House of the specific jurisdiction where the company will be registered. If the newly formed company will be registered and operate in England and Wales, then it should be sent to the following address:
Registrar of Companies
Companies House
Crown Way, Cardiff
CF14 3UZ
If the newly formed company will be registered and operate in Scotland, then the documents should be sent to the following address:
Registrar of Companies (Scotland)
Companies House
4th Floor, Edinburgh Quay 21
39 Fountainbridge, Edinburgh
EH3 9FF
Note: The addresses of the companies house are strictly for the submission of documents only.
A public limited company (PLC) is a company that can trade publicly on the stock market and whose shares can be owned by members of the public.
Requirements
To create a public limited company, a company constitution must be created and expressly state that the company is a public company. The IN01 form and the articles of association must also be created as part of the requirements.
A name should also be chosen, and the name must also end with the suffix "Plc" or "Public Limited Company" (Note: if the company is Welsh, the suffix should be the Welsh equivalent of the appropriate suffix). The chosen name of the company must not be offensive, vulgar or portray itself to be related to the government if that is not the case. A trading address should also be chosen as this will be the address where all official communication to the public limited company will be addressed. Next, at least two directors must be appointed who will oversee the day-to-day management of the company.
A Public Limited Company cannot be a one-man company because it can trade on the stock market and ownership of shares is held by the members of the public. This means that the public become stakeholders in the company's future and as such, more than one person is needed to decide how the company will run. A public company needs at least two shareholders and at least two directors.
There is also a minimum requirement for share capital for a public limited company of £50,000 and at least 25% of that amount (i.e. £12,500 must be fully paid). A shareholder agreement needs to be created, and as usual, the company must register for VAT if its annual turnover will be above £85,000.
Registration
The registration process for a public limited company is identical to that of a private limited company. The completed required documents can be submitted either electronically or physically by posting to the Companies House address.
If the company had successfully registered as as a private company, it can re-register as a public company as after meeting the already listed requirements.
After submitting its Articles of Association, the public limited company must also register a trading certificate. This certificate will be issued by the Registrar of Companies.
This trading certificate will state that the company has met the required minimum share capital and it can borrow money from the public by way of share offerings.
The fees for registration of a new company are dependent on whether the company is registered ectronically (online) or through a physical paper application.
Upon the successful registration of the company, it will be issued with a certificate of incorporation which will serve as evidence of this registration. Consequently:
A Partnership Venture is a business structure that is started and run by two or more persons together. There is no restriction on the kind of trade that a partnership business can engage in. Two major types of partnerships exist:
A general partnership is like a sole-trader business except two or more persons come together to run the business. This means that just like a sole-trader, the liabilities of the general partnership are also borne by the partners in the business. As such, if the business fails, the assets of the individual partners may be used to settle any arising business debts if necessary. The profit of the general partnership is shared among the partners of and then each partner pays tax on their respective share of the profit.
Requirements
The requirements on formation of a general partnership are contained in the Partnership Act 1890. There should be a partnership agreement that will govern how the partnership will run or operate. However, choosing not ro create such a partnership agreement would result in the general partnership being goverened by the Partnership Act 1890. For a general partnership to be created, the partners have to come together to contribute money and property that will be used to make the business become profitable. The partners should also choose a suitable name that is not offensive and does not have any suffix that is reserved for corporate entities ("Ltd", "Limited", "Plc" or "LLP"). The partnership name can be trademarke for extra security.
Registration
A general partnership should be registered with the HMRC for tax purposes. The registration can be done online on the gov.uk website or by paper registration using the SA400 form. A partner can also be registered online on the registration website or by using the SA401 form. Additionally, the partners may need to apply for and register particular licences depending on the nature of the business that the general partnership will engage in. For example, if the partnership will be a legal practice, then it is expected that the each partner will be registered with the SRA before the partnership can operate legitimately.
A limited liability partnership (LLP) is a business venture that is a mix of a company and a general partnership. In other words, the LLP has separate identity from the individual partners within it (the partners' personal assets are separate from the LLP' assets), but it retains the informality and flexibility of the general partnership.
Requirements
Firstly, a name should be chosen for the LLP. It should not have any offensive word or end with any suffix that relates to a company (e.g. "Ltd", "Limited" or "Plc"). The name of the LLP should also not be too similar to that of an existing LLP or a registered company's name. The register of companies can be used to search names of companies and LLPs
There should also be a selected office/trading address that will be used by the LLP once it starts operating. The LLP must also appoint at least 2 designated members and have an LLP Agreement that will outline the rules and terms on how the LLP will run. As a final step, the LLP must be registered with the Companies House because it is considered a corporate entity.
Registration
Registration of the LLP can either be done online through the companies house website, or through paper application using the LL IN01 form. The cost of paper registration using the form is £40. The completed LL IN01 form should be sent to the companies house at:
Registrar of Companies
Companies House
Crown Way, Cardiff
CF14 3UZ
and if the LLP is in Scotland, it should be sent to:
Registrar of Companies (Scotland)
Companies House
4th Floor, Edinburgh Quay 21
39 Fountainbridge, Edinburgh
EH3 9FF
If the LLP will be operating in a specialised field that needs a license, this license to operate would also need to be submitted to the relevant governing body of that industry.
Creating a company comes with legal, administrative and strategic business steps that must all be considered by its owners. This guide however focuses solely on the legal compliance needed to form a new company. Following these steps will ensure that the company is duly registered so that it is recognised legally and can begin trading. The process for setting up a company is relatively easy and straightforward.