Choosing a Structure for an Online Business

Are you thinking of setting up an online business? Maybe you are looking to sell products you make to consumers or a business-to-business (B2B) service like affiliate marketing. However, you may be unsure how to organise your business. There is a range of legal and business jargon that can be confusing to understand. For example, incorporated versus unincorporated businesses, limited liability companies, and partnerships. 

This article will explain the difference between incorporated and unincorporated business structures and their advantages. We also discuss the four most common types of business structures used by online companies in England.

Unincorporated vs Incorporated Businesses 

The most basic distinction between different business organisations is asking if they are incorporated or unincorporated.

Unincorporated Businesses 

Unincorporated businesses come into existence automatically. Therefore, if you are trading or intend to trade, the law will call you a sole trader (or sole proprietor). Likewise, if you are in business with another person, you will have a partnership.  

Importantly, an unincorporated business does not have a separate legal existence from its owner(s). This means that the law considers your personal assets and business assets as the same. Likewise, in the event your business is unable to meet its liabilities (such as its debts), a court can force you to sell your personal assets to cover your business’ debts. 

As you can see, when trading as an unincorporated business, there is nothing between your business’ assets and liabilities.

Sole Traders

This is the most common kind of unincorporated business in the UK, with more than 3.5 million active sole traders. This comes into being automatically at the point you start trading. 

While no registration is necessary, you are personally liable to HMRC to account for your tax liability. Therefore, you should keep records of your business sales and expenses. This is so you do not over or underpay the taxes you owe. 

As a sole trader, you are free to adopt a brand, including a business name, for your business. This is the case even if you have not incorporated. However, you cannot use certain prefixes, like:

• Limited;
• Ltd;
• Plc; and 
• Public.

Partnerships

Partnerships (“ordinary partnerships” or “unincorporated partnerships”) arise automatically when two or more people operate a business with a common view to make a profit. There are over 45,000 such partnerships in the UK.

Like sole traders, each partner has unlimited liability for any debts or obligations the partnership incurs because the partnership is not incorporated.

Moreover, each partner is liable for any debts any other partner incurs.

One of the difficulties of an unincorporated partnership is that the partnership is not capable of owning assets. Practically, any asset like an office or piece of machinery you want to use to make a profit will be purchased in your one partners’ name and be held “on trust” for the other partners.

If you are operating an enterprise with another person, you ought to try to agree to a formal partnership agreement. You can create this through a simple contract that each partner signs. A well-crafted partnership agreement can be one of the most flexible business structures. Accordingly, this is why some large law firms still use it.

Incorporated Businesses 

An incorporated business is its own legal person. This means that the business itself can: 

• enter into contracts;
• own its own assets; 
• assume its own liabilities; and 
• sue and be sued.

The notion of limited liability is closely associated with incorporated businesses. This refers to the fact that your personal liability for the debts of your company is limited, usually by the amount of equity you own in the company.

Private Limited Companies

Shareholders will own private companies. The more shares you own, the more of the company you own. If you are currently a sole trader and you incorporate your company, you will be the only shareholder unless you bring on other investors as shareholders.

As a shareholder, your liability for your company’s debts is limited only to the value of your shares (or “equity”) in the company. If the company can no longer pay its debts, shareholders are only liable for the amount of equity they own. 

The disadvantage is that running a company means you assume lots of responsibilities and obligations. Incorporating a company can, at first glance, appear to be a daunting task. Nor do the administrative formalities end after you have registered your company. For example, you must file annual reports and keep Companies House — the public body that regulates companies — informed of certain changes. You will also have to disclose certain information to the public, including your name.

Limited Liability Partnerships (LLPs)

LLPs are newer kinds of business structures that combine the flexibility of partnerships with the limited liability of a limited company. You must be in partnership with at least one other person, meaning you cannot set one up if you are to be the sole partner.

LLPs are flexible 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.

Each of the partners is not liable for any of the liabilities the partnership incurs because of the principle of limited liability.

Likewise, partners are taxed as if they were in an ordinary partnership. Further, there are similar reporting and disclosure requirements as with limited companies.

Key Takeaways

Unincorporated business structures tend to come about automatically. While they are flexible and require less upkeep than incorporated companies, they are riskier because your personal assets are not separate from your business’s liability. Incorporating your online business into a limited company or limited liability partnership (LLPs) means that your business will have its own legal personality. Your personal assets will be safe from your business debts. The downside is the administrative obligations and responsibilities that come with being a director of a company or member of an LLP. What is best for you depends on the size of your online business and your long-term plans.

If you need help with starting your online 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 at 0808 196 8584 or visit our membership page.

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