What type of business structure is best for you?

If you're looking to the future with the hopes of beginning a journey running your own startup, chances are you're feeling some mixture of excitement, trepidation, and uncertainty when it comes to the finer details of your plan.

Starting your own business is an immensely fulfilling process and an excellent means to flex your creative muscles, but there's a lot of humdrum of business behind the process of turning a vision into a dream.

One of the most important (and one of the earliest) decisions in this process will centre around your business's formation. You'll have to select which type of business structure best suits your goals for the future.

While the choice may sound easy, you'll be well-served by giving the decision ample consideration. The business structure you select will have measurable implications on the way you make money and do business. It'll impact:

• How much tax you pay
• Your degree of personal liability should the business fail
• How much administrative work is involved in the business (both before it comes to fruition and over the course of its life)
• Your ability to finance and fund your efforts

If you make the wrong selection when it comes time to choose a business structure, you could be faced with a myriad of complications in the future.

Paying professionals for guidance and advice once things go wrong is costly and, for many, an embarrassing affair—performing research well in advance will ensure you're making the best choice for your company and that you can avoid losing out on money or pride later on.

There are five business structures that you'll be able to select from as you begin forming your company. We'll dive into each one of them in-depth below, but consider this your primer and introduction to the basics of each structure.

Entrepreneurs in the UK can begin a business as a:‍

Sole trader

• Simple to operate
• Unlimited liability
• Minimal filing duties
• Registration at Companies House not required

Partnership

• High liability
• Two or more partners
• Taxes are paid separately by each partner on their share of profits

Limited liability partnership

• Profit-driven
• Requires at least two members
• Limited liability

Private limited company

• Limited liability
• Simple to operate
• Potential tax advantages
• Registration at Companies House required

Guarantee company (non-profit)

• Profits are reinvested in the company
• No "owners"—only decision-makers
• Tax exemptions

Operating as a sole trader is one of the most common ways to begin a business. It's the simplest business structure, the simplest to begin and operate, and the simplest to make changes to later on. Once a business owner establishes themselves as a sole trader, they and their business are seen (legally) as a single entity.

That means a variety of things for business owners.

On the plus side, you'll have the freedom to flex your creative and authoritative muscles and make every decision imaginable for your company. Maximum control over your own business is enticing to most—you get to do all of the decision-making and keep all of the profits that come from your business.

If you elect to operate as a sole trader, you'll also run into a handful of disadvantages. You can hardly claim all of the profits from your business, for example, without being prepared to be held accountable for any of its losses. A great deal of personal risk goes into registering as a sole trader; this isn't a factor which should be overlooked.

Liability

Sole traders face immense liability when it comes to their businesses. They're entirely responsible for running their businesses and ensuring that every step they take is well within the legal requirements set out by the government.

If you register as a sole trader, you'll also be made personally responsible for any debts that your business incurs. In the event that a consumer takes legal action against your business, you'll be held accountable for that, too. As such, a comprehensive insurance policy is recommended for sole traders.

The Ideal Candidates

The ideal candidate for sole tradership likely has a small shop or business with little risk of liability.

If you're a little short on cash or other resources to help kickstart your business's beginnings, getting started as a sole trader may be one of your only opportunities to break into the market and start making a profit—given the ease and low costs of setting up.

A business born as a partnership involves two or more individuals who agree to share that company's profits, losses, risks, costs, benefits, and responsibilities.

In some cases, these partnerships are also referred to as unincorporated entities—which is just a roundabout way of stating that each partner is self-employed and will be held personally responsible for factors like the ones mentioned above.

Perhaps the most notable aspect of a partnership is that each partner is responsible for the others' negligence or misconduct. If you have trouble trusting others or have reservations about your potential partner, you may want to look into separate structuration options for some peace of mind.

If you elect to start a partnership, pay a little extra attention to your partnership agreement document. It'll outline your and your partner's liabilities, explain ownership and profit splits, and detail what will happen if one partner elects to leave the company.

The Ideal Candidates

The ideal candidates for partnership have a reliable, positive history of completing work together in the past. Regardless of whether there are two partners or twenty, it's crucial that the group has full trust in one another. The fact that you'll be held liable for mistakes made by your partners should be reminder enough to select them wisely.

If you find the thought of beginning your business on your own a little daunting, a properly-selected partnership can be a great means of boosting your confidence. You can leverage the experience or confidence of your colleagues in order to help you build a stronger foundation for your business.

Predictably, limited liability partnerships (or LLPs) are similar to their more basic counterpart.

The key difference between a basic partnership and limited liability partnership lies in—you guessed it—liability. If you start a limited liability partnership, each partner's liability will be limited only to the funds they invest in the business.

Outside of this factor, LLPs are operated in much the same way as typical partnerships. They're often heavily profit-driven; this structure is especially favoured in the law and accountancy industries.

The Ideal Candidates

Anybody who's interested in beginning a partnership but feels hesitance when it comes to liability would be well-served by exploring their options with an LLP.

Your member agreement offers you significant flexibility in how you structure liability and determine responsibilities; you can also leverage the benefits of a partnership without devoting time and stress to concerns about personal liability.

Private limited companies are their own separate legal entities. That means that, as far as the law is concerned, your business is entirely independent from you.

Private limited companies are the most popular business structure in the UK.

Most business owners are drawn to the limited liability associated with formation. There are also a number of tax advantages that come along with operating as a limited company—you're likely to pay less in taxes than sole traders, you can defer income from a high-tax rate year to a lower-tax rate one, etc.

The Ideal Candidates

Those who are looking to be saddled with very limited liability may be well-served by this structure. Your liability (as well as the liability of any shareholders) will be limited only to investments made and unpaid shares owned.

If you don't want your personal assets entangled in your business's health, this is an excellent way to avoid that issue. Your personal assets will never be exposed in the event your business comes to an end. But there's an exception—if you've signed a personal guarantee, this will override the limited liability protection that the structure provides during the debt recovery process.

Non-profits are another business structure which operate as independent legal entities from their owners.

This presents a benefit to entrepreneurs who are hesitant to saddle themselves with significant liability or take on the debts of their business. They protect guarantors' (who pay set amounts of money towards company debts) personal finances and they're a great way to build trust between clients and investors.

Companies limited by guarantee do not have shareholders—they have members instead. Generally, these members will be free to attend general meetings, vote on business decisions, and even appoint and remove directors. These individuals have ultimate control over the company.

The Ideal Candidates

Usually, companies limited by guarantee are formed by non-profit organization owners who are looking to obtain limited financial liability.

Examples of these include a variety of clubs and membership organizations like sports associations, students' unions, and workers' co-ops. If you're hoping to start a business with the intent to raise money and promote the aims of your company, you'll be well-served by structuring as a guarantee company.

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