Businesses are considered legal entities. This means, much like people, businesses also have legal rights and responsibilities as dictated by British law. However, businesses by definition fall into different categories, each with its own legal constraints and treatment.
The type of legal structure adopted by a business will affect how it’s taxed, record-keeping and accounting practices, access to finance, which authorities it reports to, how financial liabilities like debt should be handled, and more.
Types of legal business structures in the UK
Sole trader
A self-employed individual who both runs and owns the business. The owner and the business are legally considered the same entity, although the business might trade by a different name to the owner.
Sole traders pay income tax and National Insurance.
All profit after paying tax and National Insurance belongs to the sole trader.
Also, a sole trader is personally responsible for all financial liability of their business. All debts, charges, fees and financial damages fall on the sole trader.
The owner has full responsibility for running the business, but they might hire others to work for the business.
Partnership
A partnership is made up of the individuals who have joined together to run the business. Much like a sole trader, a partnership is not legally distinct from its partners..
Each partner pays their own income tax and National Insurance – much like a sole trader.
A partnership must choose a name, have a nominated partner, and register with HMRC (His Majesty’s Revenue and Customs, which is the UK Government tax department).
That being said, a ‘partner’ doesn’t have to be a person. It could also be a legal entity, like another business.
Partners share the after-tax profits. The nominated partner is responsible for record-keeping and submission of written submissions to HMRC.
All partners share the partnership’s after-tax profits and are collectively responsible for all financial liabilities.
A partnership document is a written agreement between partners declaring:
- who the partners are
- who the nominated partner is
- each partner’s share of liability
- each partner’s share of profit
- what will happen if a partner wants to leave
Limited Liability Partnership (LLP)
LLP is similar to a partnership, but in this case, there must be 2 nominated partners responsible for record-keeping and responding to HMRC requirements. There is no limit to the number of partners.
Also, by definition, the liability of this partnership is limited to the value of shares that each partner contributes when forming the partnership.
Again, both the shares and the value of each share held by each partner are declared within the partnership document.
Limited Company (Ltd)
A separate legal entity from the individual or team who runs the business. The owners of a Limited Company are called shareholders (the named individuals who collectively own the company).
A Limited Company must have at least one nominated director and one shareholder.
The liability of the shareholders is limited to the value of shares originally invested when the company was formed.
This means if the company’s debts are beyond its means, the shareholders’ financial liability will not be charged against their personal assets. But the value of money invested may be lost.
Limited Companies pay what is called Corporation Tax against their profits.
When a Limited Company is formed, this is called incorporation. A fee is charged for every company incorporation and the company must be registered with Companies House (the UK Government agency that keeps records of all registered companies).
Companies House keeps the following information on each Ltd Company:
- company name and its registered address
- list of directors
- list of shareholders
- distribution and value of the company’s shares
- rules of administration – known as ‘articles of association’
Public Limited Company (PLC)
As a company grows and requires more funding, becoming a Public Limited Company is an opportunity to raise funds.
A Public Limited Company makes shares available for sale on the public stock market (the first time a PLC does this is known as an IPO or ‘initial public offering’). Shares are sold to entities, whether they be private individuals or organisations, like other businesses.
Those who buy shares in the PLC are called shareholders and are part-owners of the business.
Shareholders have a legal right to have a say in how the company operates. However, the leadership team of the PLC is the Chief Executive Officer (CEO) and the Board of Directors.
Not-for-profit
A not-for-profit organisation aims to make a positive social impact rather than a profit. It’s still got to be financially self-sustaining – making enough revenue to cover its running costs. But the excess funds are reinvested to further the organisation’s future successes.
Two common types of not-for-profit organisation
Charity
Funded by donations and purposed to achieve a social good. Charities typically aim to improve the health and wellbeing of disadvantaged or disabled members of society. As ‘good causes’, they are often eligible for various f governmental financial aid gifts, like grants or tax subsidies.
Social enterprise
Social enterprises have a principal aim of helping society. They often work by running profitable business operations which fund the subsidising of services certain needs within communities.