Summary
- Sole traders and ordinary partners remain personally liable for business debts because their businesses lack separate legal identity.
- Private limited companies and LLPs can own assets, enter contracts and incur debts independently from their owners.
- A private limited company can issue shares, allowing founders to document ownership and bring in investors.
- This guide explains how UK startup founders can compare sole trader, partnership, private company and LLP structures.
- LegalVision’s lawyers advise UK founders on liability exposure, entity selection, director responsibilities and LLP arrangements.
Tips for Businesses
Write down each founder’s role, contribution, voting rights and exit process before work begins. Assign intellectual property to the chosen entity. Check whether customer and supplier contracts permit transfer if you later incorporate. Keep an accurate ownership record before offering shares. Speak to a corporate lawyers at LegalVision about choosing and documenting your startup structure.
The right legal structure for a UK startup depends on the founders’ liability, tax, administration, ownership and funding plans. UK founders usually choose sole trader status, a partnership, a private limited company or a limited liability partnership. Sole traders and ordinary partners remain personally responsible for business debts because the business lacks separate legal identity. A private limited company or limited liability partnership has its own legal identity. The entity can hold assets, enter contracts and owe debts. A company limited by shares must have at least one shareholder, who may also act as a director. This article compares the four main startup structures and explains how ownership choices can affect future investment.
Unincorporated vs Incorporated Structures
The most basic distinction between different business structures is the difference between incorporated and unincorporated businesses. The two unincorporated business structures we will look at are:
- sole traders; and
- partnerships.
The two incorporated business structures we will look at are:
- private companies limited by shares; and
- limited liability partnerships.
Unincorporated Businesses Structures
A critical legal distinction you should note regarding an unincorporated business is that it does not have a separate legal existence from its owners. The law considers your business assets and liabilities the same as your personal assets and liabilities. If your business incurs a liability that it cannot repay, your creditors can come after your personal assets, like your house and other possessions. Even with insurance, your policy may not extend to this situation.
Sole Traders
This is the most common kind of unincorporated business in the UK, with more than 3.1 million active sole traders. You could be selling luxury watches, cutting hair, or babysitting. Unless you have taken other steps, you are automatically carrying on as a sole trader.
Partnerships
A partnership will automatically arise when two or more people operate some enterprise with a common view of profit. These are sometimes called ‘ordinary partnerships’, ‘general partnerships’ or ‘unincorporated partnerships’.
The Partnership Act 1890 governs partnerships. Unless there is an express agreement (written or oral) that contains the partnership terms, the Partnership Act governs the partnership terms. Therefore, you may want to come to an express agreement over the duties one partner owes the rest and vice versa.
Additionally, unincorporated partnerships cannot own assets in the partnership’s name. Practically, any sort of asset like an office or piece of machinery you want to use to make a profit will be purchased in your partners’ name and be held ‘on trust’ for the other partners.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form, and we will contact you on the same business day.
Incorporated Business Structures
The key concept behind an incorporated business is that the business exists as ‘separate legal person’. For example, this means that if you have an incorporated company, it can:
- enter into its own agreements;
- own assets;
- assume its own liabilities; and
- sue and be sued.
In most cases, those who own the company and those acting on behalf of the company will not assume liability for its debts, though they will share in its profits. This means that you are not generally personally liable for your business debts, unlike an unincorporated business.
The two incorporated businesses we will look at are:
- private limited companies; and
- limited liability partnerships.
Private Limited Companies
The ownership of a private limited company is split between its shareholders in the proportion of shares each shareholder owns. If you are currently a sole trader and incorporated a limited company, you will be the only shareholder unless you bring on other investors.
As a shareholder, liability in your company is limited to the value of your shares in the company. These shares are also known as equity. Hence, if the private company can no longer pay its debts, the shareholders are only ever liable for their equity in the company.
The disadvantage is that limited companies are highly regulated and require a good amount of paperwork to create and a lot of responsibility to maintain.
How your structure affects future investment
Founders should consider future investment before choosing a startup structure. A sole trader or ordinary partnership cannot issue company shares to investors. A private limited company can issue shares, making ownership and investment easier to document.
Before incorporation, founders should agree their ownership percentages, roles, financial contributions and decision-making rights. They should also decide what happens if a founder leaves or fails to contribute as promised. A founders’ or shareholders’ agreement can record those arrangements and reduce uncertainty later.
Founders should also place key assets in the correct entity. The company should own the intellectual property, website, brand assets and commercial contracts that support its value. Investors will usually examine these items before committing funds. Missing assignments or contracts in a founder’s personal name can delay that process.
A later change from sole trader or partnership to company requires careful planning. The founders may need to transfer assets, intellectual property, customer contracts and supplier arrangements to the new company. Some contracts require another party’s consent before transfer.
Founders planning external funding should prepare their ownership and shareholder arrangements early. Clear records help founders explain who owns the business, who controls decisions and what rights a new investor will receive.
“Founders often choose the simplest structure without considering who will own the intellectual property or how investors will join later. That shortcut can force the business to transfer assets, replace contracts and reorganise ownership when growth begins.”
Limited Liability Partnerships
Like unincorporated partnerships, you must be in business with at least one other person to structure a business through a limited liability partnership (LLP). These are flexible legal structures because you and your partners are free to decide the terms of the agreement, such as profit sharing and the duties you owe one another.
An LLP owns the assets of the business and is liable for its own debts. Likewise, members of the LLP act as its agents and only have liability up to the amount they have contributed or as otherwise agreed between the partners of the LLP.
LegalVision’s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.
Key Takeaways
The benefit of unincorporated structures is that they are flexible and do not entail many administrative obligations. The downside is that there is no limiting your personal liability, and you may be liable for your business’ debts. You can contrast unincorporated business structures with incorporated ones, like limited companies and limited liability partnerships. The liability of shareholders in a limited company is limited to the value of their shares, whilst the limit of a partner’s liability in an LLP can be agreed between the partners. The downside with incorporated business structures is the administrative responsibilities and, in particular, the responsibilities that come with being a director of a limited liability company. What is best for you depends on the size of your business and your long-term plans.
If you need help with business law, such as incorporating a company, our experienced corporate 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
What is an incorporated business?
An incorporated business has a legal identity separate from its owners. It can own property, enter contracts, owe money, sue and face claims in its own name. A private limited company or LLP usually limits an owner’s exposure to the amount they contribute or agree.
Which of the different business structures should I adopt?
Compare personal liability, tax treatment, administrative work, ownership and future funding needs. Sole trader and partnership structures offer simplicity but expose owners to business debts. Private limited companies and LLPs create separate legal entities but require more administration.
Do I need a written partnership agreement?
The law does not require a written partnership agreement. However, the Partnership Act 1890 supplies default terms when partners do not agree their own. Those terms may not suit your startup, particularly for decision-making, profit sharing and a partner’s departure.
Why might a private limited company make external investment easier?
A private limited company can issue shares to investors and record their rights through company documents and a shareholders’ agreement. Founders should agree ownership, voting and transfer rules before accepting investment.
We appreciate your feedback! Request your free consultation now.
