Choose A Legal Structure For Your Business

Choose a legal structure
for your business

1. Overview
2. Sole trader
3. Limited company
4. 'Ordinary' business partnership
5. Limited partnership and limited liability partnership
6. Unincorporated association
7. Change your business structure
1. Overview
You must choose a structure for your business. This structure will
define your legal responsibilities, like:
the paperwork you must fill in to get started

the taxes youll have to manage and pay
how you can personally take the profit your business makes
your personal responsibilities if your business makes a loss
You can change your business structure after youve started up if you
find a new structure suits you better.
Types of business
The main types are:
sole trader
limited company
business partnership
You can form an unincorporated association if youre setting up a
small organisation like a sports club or a voluntary group and dont
plan to make a profit.
You can use other structures for businesses that help people or
communities, eg social enterprises.

for your business
1. Overview
2. Sole trader
3. Limited company
2. Sole trader
If you start working for yourself, youre classed as a selfemployed sole trader- even if youve not yet told HM Revenue and
Customs (HMRC).
As a sole trader, you run your own business as an individual. You can
keep all your businesss profits after youve paid tax on them.
You can employ staff. Sole trader means youre responsible for the
business, not that you have to work alone.
Youre personally responsible for any losses your business makes.
Find out how to set up as sole trader.
Tax responsibilities
You must:
send a Self Assessment tax return every year

pay Income Tax on the profits your business makes
pay National Insurance
You must also register for VAT if you expect your takings to be more
than 82,000 a year.

for your business
1. Overview
2. Sole trader
3. Limited company
3. Limited company
A limited company is an organisation that you can set up to run your
business - its responsible in its own right for everything it does and its
finances are separate to your personal finances.
Any profit it makes is owned by the company, after it pays Corporation
Tax. The company can then share its profits.
Ownership
Every limited company has members - the people or organisations

who own shares in the company.
Directors are responsible for running the company. Directors often
own shares, but they dont have to.
Legal responsibilities
There are many legal responsibilities involved with being a director

and running a limited company.
Types of company
Limited by shares
Most limited companies are limited by shares. This means that the
shareholders responsibilities for the companys financial liabilities are
limited to the value of shares that they own but havent paid for.
Company directors arent personally responsible for debts the
business cant pay if it goes wrong, as long as they havent broken the
law.
Example
A company limited by shares issues 100 shares valued at 1 each
when its set up. Its 2 shareholders own 50 shares each and have
both paid in full for 25 of these.
If the company goes bust, the maximum the shareholders have to pay
towards its outstanding bills is 50 - the value of the remaining 25
shares that theyve each not paid for.
Private company limited by guarantee
Directors or shareholders financially back the organisation up to a
specific amount if things go wrong.
Public limited company
The companys shares are traded publicly on a market, such as the
London Stock Exchange.
You can also consider setting up a private unlimited company as an
alternative legal structure. Directors or shareholders are liable for all
debts if things go wrong.
How to set up a limited company
You must register the company with Companies House and let HM
Revenue and Customs (HMRC) know when the company starts
business activities.
Read more about setting up a private limited company.
Every financial year, the company must:
put together statutory accounts

send Companies House an annual return
send HMRC a Company Tax Return
The company must register for VAT if you expect its takings to be
more than 82,000 a year.
If youre a director of a limited company, you must:
fill in a Self Assessment tax return every year

pay tax and National Insurance through the PAYE system if the
company pays you a salary

for your business
1. Overview
2. Sole trader
3. Limited company

In a business partnership, you and your business partner (or partners)
personally share responsibility for your business.
You can share all your businesss profits between the partners. Each
partner pays tax on their share of the profits.
Partnerships in Scotland (known as firms) are different, and have a
legal personality separate from the individual partners.
Legal responsibilities
Youre personally responsible for your share of:
any losses your business makes

bills for things you buy for your business, like stock or equipment
You can set up a limited partnership or limited liability partnership if
you dont want to be personally responsible for a business losses.
A partner doesnt have to be an actual person. For example, a limited
company counts as a legal person, and can also be a partner in a
partnership.
You must choose a name for your partnership and register it with HM
Revenue and Customs (HMRC).
The nominated partner must send a partnership Self Assessment tax

returnevery year.
All the partners must:
send a personal Self Assessment tax return every year

pay Income Tax on their share of the partnerships profits
The partnership will also have to register for VAT if you expect its
takings to be more than 82,000 a year.

for your business
1. Overview
2. Sole trader
3. Limited company
5. Limited partnership and limited liability

partnership
Your liability for business debt differs depending on whether youre a
limited partnership or limited liability partnership (LLP).
You can share all the businesss profits between the partners. Each
partner pays tax on their share of the profits.
Limited partnerships
The liability for debts that cant be paid in a limited partnership is split
among partners.
Partners responsibilities differ as:
general partners can be personally liable for all the partnerships

debts
limited partners are only liable up to the amount they initially invest in
the business
General partners are also responsible for managing the business.
Read more about how to set up and run a limited partnership.
Limited liability partnerships (LLPs)
The partners in an LLP arent personally liable for debts the business
cant pay - their liability is limited to the amount of money they invest
in the business.
Partners responsibilities and share of the profits are set out in
an LLPagreement. Designated members have extra responsibilities.
Read more about how to set up and run an LLP.
Tax for limited liability and limited partnerships
Every year, the partnership must send a partnership Self Assessment

tax return to HM Revenue and Customs (HMRC).
All the partners must:
send a personal Self Assessment tax return every year

pay Income Tax on their share of the partnerships profits
You must also register the partnership for VAT if you expect your
businesss takings to be more than 82,000 a year.

for your business
1.
2.
3.
4.
Overview
Sole trader
Limited company
'Ordinary' business partnership
An unincorporated association is an organisation set up through an
agreement between a group of people who come together for a
reason other than to make a profit, eg a voluntary group or a sports
club.
You dont need to register an unincorporated association, and it

doesnt cost anything to set one up.
Individual members are personally responsible for any debts and
contractual obligations.
If the association does start trading and makes a profit, youll need to
payCorporation Tax and file a Company Tax Return in the same way
as a limited company.

for your business
1. Overview
2. Sole trader
3. Limited company

What you need to do depends on the type of business, if youre VATregistered and if you employ people.
Set up the new structure
Follow the normal steps to setting up as a:
sole trader
business partnership
limited company
limited partnership
limited liability partnership (LLP)
Tell HM Revenue and Customs (HMRC)
If youre VAT-registered, you must tell HMRC within 30 days of the

change or else youll face a penalty.
You will need to either:
cancel your VAT registration and re-register

transfer your existing VAT registration
You can do this online or send a form to HMRC by post. The address
is on the form.
If you employ people, youll also need to talk to HMRC about the
change.
Sell your business
If youre a self-employed sole trader, in a partnership or own a limited

company, there are certain rules you must follow when you sell your
business.
Close an existing structure
If you want to close down your existing business structure, follow the
usual steps.
To no longer be a sole trader
Youll need to:
tell HMRC youre no longer going to be self-employed and theyll

cancel your Class 2 National Insurance contributions
complete a Self Assessment tax return as usual (youll then start to
submit tax returns the next year for your new business structure)
To close a business partnership
Youll need to make sure your nominated partner fills in a tax
return when the partnership ends.
If the business partnership will continue without you as a partner, you
must still complete a Self Assessment tax return as usual. Youll then
start to submit tax returns the next year for your new business
structure.
To close a limited company
Youll either need to close your limited company or make it dormant.
Changing to a public limited company or an unlimited company
The guidance has information on changing a limited company to a

public limited or unlimited company.
Types of registered companies

The following are the various types of registered company. Apart from these, a business may be
set up as a sole trader (self-employed person), as a partnership or as a limited liability
partnership (LLP). Each format has its advantages and disadvantages. Incorporation Services
Limited provides an expert service for all your company formation and company law
requirements and there are more details about these types of companies on the ISL website.
Private companies limited by shares

Public limited companies (PLCs)
Property management companies
Companies Limited by guarantee
Unlimited companies
Limited Liability Partnerships (LLPs)
Community Interest Companies (CICs)
Charitable Incorporated Organisation (CIO)
Right to manage (RTM) companies
Conversion from one type of company to another
Private companies limited by shares

The vast majority of trading companies are private companies limited by shares. There are over
two million such companies registered at Companies House. A private company limited by
shares must have the word 'Limited' or 'Ltd' at the end of its name. The main advantage of
trading through a limited company is to have limited liability.
Many private companies are very small. There is no minimum capital requirement for a private
company and it is commonly less than 100. Approximately 90% of private companies are small
or medium sized companies which means that they can file modified (i.e.
simplified) accounts at Companies House, rather than full accounts.
A private company may not offer shares or debentures to the public: CA 2006, sec755, only a
public company (PLC) may do so.
For more advice on the practical aspects of forming a private limited company go to
the Incorporation Services Limitedwebsite.
Public Limited Companies (PLC)
A small proportion of companies are public companies. Such a company must have a name
ending in the words 'public limited company' or 'PLC'. This type of company is appropriate for
larger businesses where shares are intended to be available to the general public. Most public
companies are not set up as such but are converted from private ones.
A public company must have a minimum share capital of 50,000, of which at least one-quarter
plus any share premium must be paid up before the company can obtain its trading certificate
from Companies House and start trading. This is the only type of company which may raise
capital by offering securities (shares or debentures) to the public. This is usually done by
obtaining a listing on the Stock Exchange or another public market such as the Alternative
Investment Market.
Public companies are subject to more stringent legal requirements than private companies on a
wide range of matters, but especially in relation to share capital, directors and accounts.
For more advice on the practical aspects of setting up a PLC, or converting an existing private
company into a PLC, go to the Incorporation Services Limited website.
Property Management Companies

A property management company is a type of private limited company. Such a company will be
set up in order to hold an interest in property which is divided into units, each unit being owned
separately. A typical example is a large house divided into a number of flats, each flat being
owned by one or two people. There will usually be a need for somebody to own the building as a
whole, including common parts such as stairways, gardens, access paths etc. Unless there is a
landlord retaining this interest, the simplest legal device is for a company to be set up to own the
freehold of the property, and for each owner of a flat to have an interest in the company.
Most property management companies are private companies limited by shares with appropriate
articles of association, though some are limited by guarantee.
Some property management companies will do no more than hold the title to property and so can
be considered asdormant companies under the Companies Acts, allowing pro forma dormant
company accounts to be registered atCompanies House. This helps keep administration costs to
a minimum and is useful where where the property is small with little or no routine maintenance
which can be arranged between the owners of the flats without involving the company.
For more advice on the practical aspects of forming a property management company and
running it once registered, go to the Incorporation Services Limited website.
Companies Limited by Guarantee

The Community Companies website has much more detailed information about
companies limited by guarantee, charitable companies, community businesses,
community interest companies and related topics.
A company limited by guarantee is private company, very like a private company limited by
shares, but it does not have a share capital. It is widely used for charities, clubs, community
enterprises and some co-operatives. The vast majority of such companies are non-profit
distributing, but they do not have to be.
A company limited by guarantee is registered at Companies House, has articles of
association, directors, etc., and is subject to all the requirements of the Companies Acts (except
those relating to shares). There are no shares and so no shareholders, but such a company does
have members, who meet and control the company through general meetings. The directors are
often called a management committee or council of management, etc. but in law are still
company directors and subject to all the rules that affect other directors.
A company limited by guarantee confers limited liability as effectively as a company limited by
shares. The articles state that the members guarantee to pay its debts, but only up to a fixed
amount each. Usually that sum is 1, and no member can be liable for more than that amount if
the company fails.
For more advice on the practical aspects of forming a company limited by guarantee, and the
uses of such companies, go to the Community Companies website.
Unlimited companies
Many people refer to a sole trader's business or a partnership as an unlimited company, but such
businesses are not in fact companies. It is possible to register at Companies House a private
company which is unlimited, that is the members accept complete liability for the company's
debts. If the company needs money to pay its debts a call can be made on each of the
shareholders to contribute a fixed amount on each share held by them.
An unlimited company has all the other features of a private company limited by shares. It is
registered at Companies House, has members (usually shareholders), directors, articles, etc. Its
one major advantage is that it is not required to register annual accounts at Companies House.
This type of company is suitable for a business where the risk of insolvency is very low or nonexistent, or where it is important not to put the company's accounts on the public register at
Companies House. There are few unlimited companies, but this may be because their existence
and advantage are not widely appreciated.
For more advice on the practical aspects of forming an unlimited company company and running
it once registered,contact Incorporation Services Limited.
Limited Liability Partnerships (LLPs)

Incorporation Services Limited registers LLPs
The limited liability partnership is a comparatively new type of business structure which became
available in 2001. It is a hybrid between a private company limited by shares and a partnership.
An LLP is a separate legal entity conferring full limited liability on its members. It is created by
registration at Companies House. There must be at least two members, but there is no upper
limit. An LLP is subject to the same rules as a private limited company for the registration
of accounts at Companies House, and the auditing of its accounts. The same exemptions from
these requirements are available.
The Act does not impose a structure for the management of an LLP. There are no statutory
provisions for general meetings, directors, company secretary, share allotments, etc. As with a
common law partnership, these are matters for the LLP agreement. There is no statutory
requirement to register (or even to have) a written LLP agreement, but such an agreement is
essential in practice. The LLP is treated for tax purposes as an ordinary partnership: i.e. each
partner is liable to income tax for his or her share of the profits, and to Capital Gains Tax in
respect of any gains made on the disposal of assets by the LLP. Click here for more details on
LLPs. For the formation of an LLP, go to theIncorporation Services Limited website. For LLP
agreements go to the Company Law Solutions website.
Community Interest Companies (CICs)
The Community Companies website has much more detailed information about CICs as
well as companies limited by guarantee, charitable companies, community businesses
and related topics.
Community Interest Companies are a relatively new type of company (from 2005) which can only
be registered for objects which are for the good of the community. The Companies (Audit,
Investigations and Community Enterprise) Act 2004 ('the Act'), and The Community Interest
Company Regulations made under the Act, establish the legislative framework for CICs.
Apart from having to have objects that benefit the community, the two main features that
distinguish CICs from 'normal' companies are the asset lock and the Community Interest
Statement and Report. Under the asset lock provisions, the assets and profits must be
permanently retained within the CIC, and used solely for community benefit, or transferred to
another organisation which itself has an asset lock, such as a charity, or another CIC. With every
application to form a CIC, a Community Interest Statement must be lodged, with the usual
documents, when seeking company registration. This statement, signed by all the directors, must
describe the company's objects and certify that the company is formed to serve the community
rather than for private profit. CICs can be limited by shares or by guarantee. For more
information about CICs, go to the Community Companies website.
Charitable Incorporated Organisations (CIOs)

This new type of company became available for registration in England and Wales from 10th.
December 2012.It has been available in Scotland since 1st. April 2011. Charitable Incorporated
Organisations (CIOs) were brought into being by the Charities Act 2006. Detailed regulations are
in the Charitable Incorporated Organisations (General) Regulations 2012 SI 3012. It became
possible to submit applications for registration from 10th. December 2012 in England and 1st.
April 2011. CIOs are designed to be a more efficient way to register an incorporated charity. Until
CIOs became available a charity that wished to be incorporated (and so have limited liability) had
to register as both a company limited by guarantee and as a charity. Using a CIO should be
simpler to incorporate and run as it will be registered with just one body (the Charity
Commission) and will only have to submit one annual return and one set of accounts per
year. Further details are on the Charity Commission's CIO Page for CIOs in England and Wales
and from the Office of the Scottish Charity Regulator for CIOs in Scotland. Community
Companies CIC offers a full package of services for CIOs, from first registration to secretarial and
other drafting work.
Right to Manage (RTM) Companies

The Commonhold and Leasehold Reform Act 2002 provides a right for leaseholders to take over
the landlord's management functions by transferring them to a special company set up for the
purpose, the Right To Manage (RTM) company. The right was introduced to empower
leaseholders, who generally hold the majority of value in the property, to take responsibility for
the management of their block. It applies only to leaseholders of flats, not of houses. The
process is relatively simple. The landlord's consent is not required, nor is any order of court. The
right is exercised by the service of a formal notice on the landlord. After a set period of time, the
management transfers to the right to manage company (the RTM company) which has been set
up by the leaseholders. Once the right to manage has been acquired, the landlord is also entitled
to membership of the company.
We cannot advise about putting the process into effect, but we can set up the RTM Company.
There are special regulations in the RTM Companies (Model Articles) (England) Regulations
2009 as to the contents of the articles of association.
Contact Incorporation Services Limited for the electronic registration of a Right To Manage
Company.
Conversion from one type to another
Company Law Solutions provides company conversion services
A private company limited by shares can be converted into a public company and vice versa, or
to an unlimited company. An unlimited company can be converted to a private company limited
by shares. A company limited by guarantee cannot be converted to a company limited by shares
or vice versa.
Existing companies can convert themselves into CICs but such conversions require the approval
of the CIC Regulator. Where the company converting to a CIC is a charity, the permission of the
Charity Commission is needed for a change of name.
For more advice on the practical aspects of converting one type of company to another, please
contact Company Law Solutions.
TYPES OF COMPANY
The following gives a brief guide to the various types of companies that can be incorporated in the UK and
their various principal characteristics. More detailed information can be found under each separate heading
within this section and in the customer support section. Use this list and the links provided to help decide
which company formation you need.
The types of company we can incorporate for customers include:
Private Company Limited by Shares
Ready Made Private Limited Company
Private Company Limited by Guarantee
Public Limited Company
Limited Liability Partnership
Flat Management Company
Right to Manage Company
Community Interest Company
Private Company Limited By Shares
Private Limited Company
Normal commercial trading purposes
Objects unrestricted
Suits the majority of requirements in the UK
Can undertake any nature of business
Can operate anywhere in the world
Members have limited liability
Can have a sole director and sole shareholder
Can have corporate officers
Limited companies are often advantageous for their shareholders regarding taxation
Incorporated within hours
Own choice of name
click here for more information
Ready Made Private Limited Company
As above but registration number available immediately upon receipt of payment
Takes longer to complete registration of new directors and transfer shares to new owners
More expensive
Restricted choice of name
Private Company Limited by Guarantee
Non-profit corporate entity assets or financial surplus cannot be distributed to members
A Guarantee company is not owned by its members and cannot be transferred by its members for
value it has no share capital
Suitable for clubs, membership organisations, sports associations etc
Can apply for charitable status
Can be incorporated in most circumstances within hours
Some input required from client to establish main objects if required or objects can be unrestricted
Public Limited Company
Necessary if the company is to trade its shares to the public
Can undertake any nature of business
Can operate anywhere in the world
Own choice of name
High initial capital commitment
Must have at least two directors and one shareholder
A private company can be converted to a PLC, so most PLCs start life as normal private companies and
convert at a later date prior to flotation of the stock markets
Limited Liability Partnership
Suitable for new and existing partnerships wishing to obtain limited liability status, and aimed
particularly at professional partnerships such as accountancy and solicitors firms
Maintains tax status of a partnership
Suitable for most commercial business activities
Flat Management Company
May be either a company limited by shares or a company limited by guarantee
Beneficial for property developers planning to sell flats or apartments in a development once
completed
Can be used to spread the freehold of a number of flats across the individual owners allowing easy
transfer and sale of each flat
Can be used purely as a vehicle to manage the maintenance of a property comprising of several flats
or apartments
Right to Manage Company
A form of company limited by guarantee
Allows leaseholders to purchase freehold properties or acquire the rights to manage a property under
the Commonhold and Leasehold Reform Act 2002
Applies where a building is sub-divided into two or more flats or tenancies
Uses prescribed Articles of Association
Community Interest Company
Can be either limited by shares, limited by guarantee or a public company
Intended for use by social enterprises who wish to utilise their profits and assets for public benefit
Requires approval from the CIC Regulator before incorporation
Cannot have charitable status

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