Choosing the right structure for your business

A sole proprietorship is a business owned and operated by a lone individual. It is not a separate legal entity under the law, meaning that the debts and liabilities incurred by the business are incurred by the individual i.e. the business's debts are the sole proprietors debts.

Although one of the easiest business structures to operate, it does not come without legal obligations - imposed most stringently through income tax.

A partnership is a business enterprise recognised under the law, owned and operated by two or more partners who will share ownership of the partnership assets and responsibility for its liabilities. The split between authority and responsibilities can be modified and is often detailed in the Partnership Agreement (it is recommended ALL partnerships have a documented PA).

As a legal entity, a partnership can enter into contracts and borrow money, although creditors will usually ask for a personal guarantee from the partners.

The partners are treated as individuals for tax purposes i.e. the partners are taxed on their individual income (which will include their share of partnership profits).

An LLP, unlike an ordinary partnership, offers its members limited liability. It is a legal entity separate from its members, meaning it can enter into contracts (inc. employment contracts), sue and be sued, and grant charges over the assets it holds, all in its own name.

The key filing difference between a partnership and an LLP is that an LLP must file a set of annual accounts at Companies House.

The members are those individuals registered at Companies House, of which at least two must be ‘designated members’ responsible for making filings.

Certain members will be taxed on their share of partnership profits under self-assessment, whereas others who receive a fixed profit share (considered as a salary) are to be taxed on that income as employment income, paying tax also under PAYE and Class 1 NICs.

A limited company is a separate legal entity that has (largely) all the legal rights as an individual by statute. As with an LLP, a limited company can own its own assets, enter into legal agreements and is responsible for its own debts, as well as the requirement to file a set of annual accounts with Companies House.  However, unlike an LLP, a limited company must pay tax on its profits, and must therefore complete and file a tax return (CT600 Corporation Tax Return) with HMRC.

An incorporation form must be submitted to and approved by Companies House before it can start trading under a limited company name. As part of this, a company must adopt (and file) a Memorandum of Association and Articles of Association. Together, these documents formally govern the rights, responsibilities and obligations (either by the company or by statute) of the Shareholders, Directors and Officers of the company.