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If you are starting a new business in the UK, it is essential to consider what structure your business will take. Business structures can vary from simple structures, like a sole trader, to slightly more complex structures, like limited liability partnerships. The best option for you will depend on what you want to gain from your business, the type of support you want, and any limited liability or tax benefits from different structures. In this article, we will discuss how a company structure can help facilitate high growth for your business.
When to Decide on Company Structure
When starting a business, the business structure you choose is essential from a legal and commercial perspective. The right business structure can accelerate growth and help you reach your business goals faster. Your choice of company structure will depend on a number of different factors, including:
- the size of your business;
- whether limited liability protection is required;
- how many owners of the business there are; and
- your personal goals for the company.
Sole Trader vs Company Structure
Most individuals begin their business journey as a sole trader. A sole trader is a business structure where one individual owns and operates their business. This means they are responsible for all day-to-day management and operational tasks, and all financial and tax obligations. As a sole trader, you are liable for all business debts but also benefit from all business profits.
In contrast, a company is a separate legal entity that can be, for example, owned by shareholders. The company itself is separate from those who run or own it.
Advantages of a sole trader include:
- simple business structure;
- fewer legal/regulatory requirements; and
- complete control over your business.
However, running your business as a sole trader will have pitfalls compared to structuring your business as a company, including:
- limitations in raising capital/obtaining loans;
- personal liability in contrast to limited liability protection;
- limited collaboration with other business-minded individuals; and
- running the business off personal finances alone.
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How a Company Structure Can Generate Growth
There are five key reasons why a company structure is ideal for generating growth. We explore these below.
- Limited Liability: One of the most important benefits of a company structure is the protection of personal assets. Limited liability protection allows your personal assets to remain separate from those belonging to the company. Therefore, your personal finances are protected from creditors if the company ever incurs large business debts.
- Raising Capital: As a company, you will have a greater chance of securing business loans from banks and the opportunity to enter into new business arrangements with other companies. Capital allows your business to expand and become a well-known name in your industry. If you choose to, you can also raise capital via selling stocks and shares. This is a huge benefit, as sole traders are limited to their own personal finances to run their business.
- Succession Planning: The law treats sole traders and their businesses as one and the same entity. As such, when the business owner dies, the business dies with them. In contrast, company structures, such as LLPs and limited companies, exist as a separate entity to their owners, providing continuity if an owner passes away.
- Clear Management Structure: Companies often have a clear management and divisional structure, with defined roles and responsibilities for the owners and managers. There may also be different departments that are in charge of specific projects, helping to streamline the business unit. This can help ensure that the decision-making process is consistent and organised, which can benefit the business’ overall success, especially for large companies.
- Tax Benefits: Depending on the type of company structure, you may benefit from certain tax benefits. To determine which type of structure will benefit your business the most, you should discuss this with a professional expert.
Key Takeaways
Choosing a company structure can benefit your business in many ways, even if you are starting out as a small company. It can assist your company’s growth by providing access to funds and protecting your personal assets through limited liability protection.
If you think a company structure is a good fit for your business, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The most common types of company structures are sole traders, partnerships, limited liability partnerships and limited liability companies. Each type of company structure will be suitable for different types of business.
As a sole trader, your business may not grow at the rate you hope. You may also find it difficult to protect your personal assets and secure outside investment. If you have a large number of personal assets, these may be at risk if your business falls into financial trouble.
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