Ways to structure a business
When setting up a business the structure that you adopt will define the legal liabilities which you may face in running one. It depends on the circumstances as to which business structure is the most beneficial since there are wide differences between them. This guide only touches on some of them.
Usually the overriding aim will be to achieve limited liability, which will mean that the incorporation of a company is the main option (although this can also be achieved by setting up a limited liability partnership). If limited liability is not important, then tax factors will be the driving force. It is important that you get both accounting and legal advice as to the best structure for your business.
The main types of business structures are:
- a sole trader
- a limited company
- a partnership
- a limited liability partnership
- an unincorporated association.
As a sole trader, you are running the business as an individual. There is no separate entity which runs it. You keep all your business profits and you pay tax on them. As a sole trader you are responsible for the liabilities of the business. You are therefore personally responsible for any losses that it makes.
If you set up a company this will be a separate legal entity in its own right and it will have its own benefits and liabilities. The finances of the company are separate to your personal finances.
Any profit made in the business will be owned by the company (subject to tax). The company can then distribute its profits to the shareholders by way of dividend, and when the company is wound up its capital (after deducting all liabilities to third parties) will be divided amongst the shareholders in proportion to their shareholdings.