What type of business structure is best for you?

Chris Andreou

April 27, 2021

type of business guide

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Limited Company

Introduction

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.

The Five Business Structures for UK Startups

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

Registering a Limited Company Guide

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Registering a Limited Company Guide

Sole Trader

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.

Legal scales weighing business liability

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.

Partnership

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.

Limited Liability Partnership

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.

Registering a Limited Company Guide

What's Inside:

  • What is a Limited Company
  • 10 step process for setting up a Limited Company
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Registering a Limited Company Guide

What's Inside:

  • What is a Limited Company
  • 10 step process for setting up a Limited Company

Private Limited Company

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.

Guarantee Company (Non-Profit)

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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Featured Article

What is a sole trader?

In this article, we look at what it means to be a sole trader, the benefits and downsides associated with operating as a sole trader, tax responsibilities and more.

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Contractor Business Services UK

Firstly, we'll start with the services that we provide which covers the critical things you'll need to start and operate your contracting business.

For those just getting started, we provide free company registration on Companies House. This is typically done within 24 hours of submitting your details to Forma. It can take under 5 minutes to provide all your details and we'll just need a proof of ID and proof of address for each of the company directors.

We cover all of your key company filing requirements like annual accounts, confirmation statements, corporation tax and ensuring you meet all filing deadlines.

We also help with your annual Self Assessment which is a requirement for all company directors.

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19 Places to Find Contractor Jobs & Roles

When you get into contracting, it can get stressful when your project end date is just around the corner and you haven't secured your next role. This amps up even more once you finish a contract and you're looking for your next gig.

As a specialist contractor accounting business founded by contractors, one of the key questions we get asked is about where to find roles. So, we decided to compile a list of some of the best contractor job portals, platforms, recruiters and consultancies.

If you have anything else to add then please let us know at info@goforma.com.

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Umbrella Companies Explained: FAQs for Contractors

Whether you're newly self-employed or an experienced contractor, there'll be aspects that you need more information on when you're deciding if working through an umbrella company is right for you.

To help you along, we've compiled a list of FAQs that contractors often ask:


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What is a sole trader?

If you're planning to start out on your own, one of the most important decisions you'll need to make is figuring out how you should structure your business.

As a freelancer, contractor or small business owner, there are three main types of legal structures you should consider:

  • Sole proprietorship
  • Limited company
  • Working through an umbrella company

It's a decision that requires careful consideration, and it's important that you seek advice from qualified professionals when you weigh out the pros and cons of each business structure. To begin with, you need to have a good grasp of the basics-and here's where our guide comes into the picture.

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Key considerations when you register a Limited Company

As a freelancer, contractor, or small business, it is typical to start with the simple structure of operating as a Sole Trader.

While taxes and other administrative work may be relatively easy when you are a Sole Trader, as your volume of business goes up, there are more and more reasons to take on the task of becoming a Limited Company.

For instance:

  • A Limited Company protects your personal assets. If you are found liable in a lawsuit, only your business assets are at risk.
  • A Limited Company is usually more tax efficient than being a Sole Trader.
  • Once you have your name chosen as a Limited Company registered through Companies House, no one else can take your company name.

Luckily, running a Limited Company doesn't have to be exceedingly complex, though following a set plan will help to keep the complexity to a minimum.

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Is a contractor an employee?

Contractors can be self-employed, a worker or an employee. Those who are employed through an umbrella company or an agency could be considered a worker or an employee.

If a contractor is a sole trader or runs a limited company, he or she will then be considered a self-employed person.

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What are the advantages of contracting?

The advantages of contracting are:

  • Flexibility: Contractors have a lot more control over their work life often deciding when they work, where they work and how they work
  • Increased earnings: Contractors are often paid more due to their skillset and the flexible nature of their working relationships. Additionally, contractors who operate through their own limited company can benefit from tax efficiencies.
  • Greater development: Often working with multiple clients throughout their career, contractors are exposed to a lot of opportunities to develop their skills and build on their experience in their area of expertise.
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What is subcontracting?

As an independent contractor, there may come a point in time where you need to consider subcontracting-you might decide to take on work as a subcontractor, or hire a subcontractor for your projects.

Whichever option you're exploring, how do you decide if the benefits truly outweigh the cons? And are there important tips you need to keep in mind?

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How to Become a Contractor

So, you're thinking of becoming a contractor.

There's probably one of three reasons driving this:

You've received a Job Offer

You've just received a job offer, and now need to decide on whether to set up a limited company, umbrella company or become a sole trader (or you may not have the choice in deciding).

You're in the right place.

This guide will walk you through the best company structure for you, accounting support, VAT, business services you need to consider and finding new opportunities.

You want to increase your pay

You'd like to increase your pay by switching from permanent roles to interim/ contractor roles.

Contracting can be very lucrative.

You'll need to be comfortable with a certain level of risk (short notice periods), increased monthly admin (as a Limited Company) and less benefits than being an employee (paid leave, sick days).

However, you'll earn more, get greater flexibility and hopefully grow a consulting business.

Project Flexibility

Getting multiple requests for your services? Amazing.

Setting yourself up as a contractor through a Limited Company means you can start expanding your client base rapidly and work on different projects a few days a week.

You can still set this up as a current PAYE employee of a company, and this can be a great stepping stone to launching your own business.

Let's talk about the right business structure for you.

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What is a Contractor?

You've been thinking about making the leap from employee to self-employed. If contracting is one of the options you're considering, this article is for you.

We'll run you through the basics, including what it means to be a contractor, how it differs from full-time employment and the type of business structures that contractors typically choose.

Contractors are self-employed individuals who provide services to a business. Generally, they're highly skilled, and are hired for projects that require specialist skills or to bolster a team during busy periods.

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When do I need a Limited company as a contractor?

There is no clear cut time as to when you should start working through your own limited company. With other routes available-such as operating as a sole trader, or working through an umbrella company-it is always worth weighing up what is best for you and your circumstances.

With that being said, if you plan to work as an independent contractor for the foreseeable future, opening your own limited company at the early stages can maximise your opportunities for reaping the benefits of having your own company straight away.

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What are the different types of contractors?

There are different types of contractor jobs available across diverse sectors. Contractors may be hired to perform services such as:

  • Marketing
  • IT maintenance and support
  • Graphic design
  • Recruitment
  • Business development
  • Catering
  • Construction work
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Self Employed Registration Guide

  • What is a Sole Trader?
  • Sole trader advantages
  • Sole trader disadvantages
  • How to register self employed
  • Sole trader responsibilities
  • Self employed tax
  • Important self employed deadlines
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How to Start Contracting Guide

  • What is a contractor
  • Types of contractors
  • Contractor business structures
  • Contractor accounting
  • Understanding IR35
  • Contractor insurance
  • Banking for contractors
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How to set up a Limited Company

When you set up a limited company, you'll enjoy many advantages you don't get as a sole trader. Not only is it a tax-efficient way to run your business, it's also a great way to limit your personal liability and increase your credibility with customers. Additionally, it could open new avenues of work that wouldn't be open to you if you were operating as a sole trader, especially some contractor roles.

One of the disadvantages of running a limited company is that it involves a lot of paperwork, but with the help of this guide, we'll clear away the jargon and tell you exactly what you need.

If you're unsure about whether a limited company is right for you, check out our handy article comparing the differences between Limited companies and Sole Traders to see which business entity is right for you.

If you've got more important things to do than dealing with extra admin, you can always take advantage of one of our accountancy packages and we'll do all the forms and applications for you.

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5 advantages of a limited company

The advantages of operating as a limited company are well known. It can be a great way to maximise your take-home pay, improve your credibility with customers and limit your personal liability. Like most things in life, it's a case of what's best for your situation. While the positives outweigh the negatives for most people, there are a few things you should know before you make the jump to a limited company.

In this article, we'll outline the disadvantages of operating as a private limited company. Bear in mind that there are many advantages to a limited company and in many cases, these advantages will outweigh the disadvantages, so don't think of this as a report of doom and gloom.

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What are Personal service companies?

While there isn't a legal or formal definition of the term, personal service companies (PSC) refer to limited companies that are owned by a contractor, who is also the only shareholder and sole director. In some instances, the company may also be owned by a very small group of individuals.

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What is an independent contractor?

An independent contractor is an individual who is engaged in a work agreement with a company or entity as a non-employee.

Factors that identify an independent contractor are:

  • They have a greater degree of control over their work
  • They offer a special skill set
  • They are able to get a replacement
  • They aren't entitled to employment benefits
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Umbrella vs Limited Company

Let's compare the advantages and drawbacks of setting up a limited company VS working through an umbrella company.

Why set up a limited company?

  • Limited liability
  • Tax efficiencies
  • Increased credibility

Why not set up a limited company?

  • Increased legal and administrative requirements
  • Less privacy; details of the company are publicly available

Why work through an umbrella company?

  • Ease of use
  • Flexibility
  • Entitled to statutory benefits

Why not work through an umbrella company?

  • Costly way to operate
  • Lack of control
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When do I need a Limited Company?

There is no clear cut time as to when you should start working through your own limited company. With other routes available-such as operating as a sole trader, or working through an umbrella company-it is always worth weighing up what is best for you and your circumstances.

With that being said, if you plan to work as an independent contractor for the foreseeable future, opening your own limited company at the early stages can maximise your opportunities for reaping the benefits of having your own company straight away.

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Registering a Limited Company Guide

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