Exploring Some Business Structures For UK Startups

One of the earliest and most important decisions a person may make when setting up a business in the UK is selecting the most appropriate legal structure for their business. This choice will shape how the business operates, how profits are shared, and the extent to which individuals involved in the business, such as founders or partners, can make decisions and carry personal financial risk. 

The choice of structure may impact how attractive the business is to investors, clients, customers and even suppliers. While there is no one-size-fits-all answer, exploring the key elements of the commonly used business structures may give some insight into which structure could align best with the startup goals and circumstances of the business.

The most common business structures for startups are sole trader, partnership, and private limited company (Ltd). Each offers distinct advantages and limitations depending on the goals of the business, risk appetite, and growth plans. In more limited circumstances, usually professional sectors, Limited Liability Partnerships are also a business structure that may be given consideration.

Sole trader

For many solo founders, especially those testing a business idea or offering freelance services, becoming a sole trader is the simplest route. Whilst the advantage of being a sole trader is that the individual retains full control over their business and there are less formal administrative requirements, the simplicity of a sole trader set up comes at a cost; the sole trader remains personally liable for all debts and obligations. This means a sole trader’s personal assets could be at risk if things go wrong. Sole trader status also limits its ability to raise investment and may not convey the same credibility to potential customers and clients as a company structure.

Partnership

If a business startup has two or more co-founders, a partnership allows those founders to share responsibilities, profits, and decision-making. Like sole traders, partners are personally liable for business debts (subject to certain limited liability partnership set ups).

A well-drafted partnership agreement is commonly used and is a prudent way to clarify roles to avoid disputes, reflect how profits and liabilities are to be split, and set out the continuity of the partnership in the event of the death, retirement, insolvency, etc., of a partner. The partnership structure is generally better suited to low-risk ventures or professional services and requires trust and loyalty between the partners.

Private limited company (Ltd)

For a lot of UK startups, including those in the technology and ecommerce sectors, forming a private limited company is the preferred structure. It offers limited liability, meaning the personal assets of the founders/owners are protected if the business fails or incurs liabilities (subject to where persons in control of the business are in breach of their statutory duties or other legal obligations whereupon personal liability may be established).  A private limited company can provide a structured way to manage profits, issue shares to investors (not the public), and enhance the business’s credibility with customers and clients. However, a private limited company structure does come with more administrative responsibilities, including filing annual accounts with Companies House, maintaining statutory records, and complying with statutory and legal duties and obligations.

Limited liability partnership (LLP)

Although not one of the common business structures for UK startups, it is worth mentioning Limited Liability Partnerships. LLPs are often used when a number of individuals come together in a professional capacity, such as a law firm, accountants or architecture practices to carry on business. An LLP can also suit startups where multiple individuals want to share management and profits while limiting personal liability. An LLP offers flexibility in how profits are distributed and how the business is run, but it requires more formal administrative setup and ongoing compliance. It’s not typically the first choice for product-based, e-commerce, or technology sector startups aiming to scale quickly.

Business structure considerations

When contemplating different business structures, the following points will undoubtedly need to be considered or addressed, and, in this regard, it is important to seek appropriate professional advice:

Whilst it is possible to change your business structure at a later time (following initial startup), doing so can be complex and may come with its own implications, including legal and financial. Many founders spend time early on exploring which structure may suit their business.

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This article is intended to provide an overview of some different business structures for business startups. It does not constitute legal, tax, or accountancy advice. The business structures referred to above are not exhaustive, and other legal forums may be available depending on the nature and needs of your business. Businesses should consider their specific circumstances and seek independent professional advice tailored to such circumstances before making any decisions regarding business structure, taxation, compliance or any other areas where professional advice is required.