So, you’ve decided to start a business. Congratulations! The next step is to decide what kind of business you should start. In previous articles, we’ve looked at the features, advantages, and disadvantages of the main types of business in the UK. But you might still be wondering, “What kind of business should I start?”
In this article, we compare the different options and discuss exactly when you might want to use a specific kind of business.
Types of Business in the UK
When setting up a business in the UK, there are several kinds of business structure to choose from. It’s important to understand the features as well as the advantages and disadvantages of the different types of business structure. This allows you to find the best one for your specific circumstances.
The right business structure for you depends on factors such as the size of your business, your industry, and the potential for scalability. As always, this article serves only as an overview of the options available to you. It’s important to get legal and financial advice specific to your circumstances before setting up a business. Check out the Gov.UK website for more information about the different types of business in the UK.
In the UK, there are 3 broad types of business structure – sole trader (or sole proprietorship), partnership, and limited company.
As a sole trader or sole proprietor, you are self-employed and personally responsible for running the business. You must register as self-employed with HMRC and keep business records detailing your profits, losses, and taxes. There is no separation between you and the business. This means that you can enjoy all the profits, but you are also personally liable for the debts and losses of the business.
There are 3 types of partnerships in the UK – general, limited, and limited liability. A general partnership involves two or more partners who can act on each other’s behalf when representing the partnership. A general partnership does not have a separate legal personality from its owners. This means the partners are personally liable for both the debts and the obligations of the partnership.
A limited partnership has at least one general partner and one limited partner. General partners are fully and personally liable for the debts and obligations of the partnership. In return, they have the right to manage and represent the partnership externally. Limited partners, on the other hand, are passive investors who are only liable for the debts and obligations of the partnership up to the amount of their contribution. Limited partners have no management rights in the partnership.
A limited liability partnership is a hybrid between a company and a partnership made up of at least two members. Unlike ordinary and limited partnerships, limited liability partnerships are incorporated, and so its members aren’t personally liable for the debts and obligations of the business. Limited liability partnerships have more regulatory obligations than other types of partnerships.
There are various different company structures available in the UK. Two of the most common are public limited companies and private limited companies. A public limited company is a business owned by shareholders and managed by directors that can sell shares to the public on a stock exchange.
A private limited company is an incorporated business where the investment is provided by the founding shareholders who can only sell or transfer shares privately (i.e. not on a stock exchange).
So, we’ve gone through the main types of business in the UK. But I can still hear you saying, “That’s great, but what type of business should I start?”
What Kind of Business Should I Start?
When starting a business, various factors might influence your choice of business structure. These include:
There are a few things to ask yourself when it comes to capital:
- What level of capital do you need to start your business?
- Do you want the ability to raise large amounts of capital now or in the future to grow your business?
- Are you the only person investing capital in the business or are there other investors?
Broadly speaking, the more complex the business structure, the more scope there is to raise capital and expand the business. For example, a public limited company can raise large amounts of capital by issuing new shares to the public. But it’s also one of the most complex business structures available.
Level of Financial Risk
Are you comfortable being personally liable for the debts and liabilities of the business? Or do you want to limit your liability? Again, broadly speaking, the more you diversify risk or limit the liability involved, the more paperwork and regulatory requirements there are.
For example, two people in an ordinary partnership are personally liable for the debts and liabilities of the business. If they were to incorporate it as a private limited company, the business’ liabilities would stay separate from their personal ones.
Degree of Control
Do you want to have full management rights in the business, or would you prefer to share the responsibility with others? For example, a sole proprietor has full control over their business and the decisions they make, without the need to consult with anyone. In a partnership, the partners share the decision-making.
It’s important to think about these factors relevant to your business and the pros and cons of the different business structures available to you. Let’s compare some of these, with examples of when you might choose a specific business structure.
Sole Trader vs Limited Partnership
The main advantage of setting up a business in the UK as a sole trader is its simplicity. There is minimal paperwork and few regulatory requirements involved in setting up and operating as a sole trader. You also get to run the show. You make all business decisions and keep all the profits. But this also means you are personally liable for all the debts and obligations of the business.
Becoming a sole trader is ideal for freelancers working on their own. For example, if you’re a freelance writer who has three clients on retainer, while doing additional work for ad hoc clients when you have the capacity, and you have no intention of employing someone or scaling up the business beyond the work you can do yourself, operating as a sole trader might be an attractive option given the minimal administration involved.
On the other hand, if you’re considering starting a business with someone, or the business requires more funding than what you alone can provide, then a partnership is the better option. For example, if you decide to set up an online store selling natural makeup products and a friend wants to invest in it but not manage the business, a limited partnership might be a good business structure to use.
Limited Company vs Sole Trader
One of the main differences between a limited company and a sole trader is the level of personal liability. A sole trader is treated as one and the same as their business and is personally liable for its debts and obligations. In comparison, a limited company has a separate legal identity, protecting its shareholders’ personal assets.
If there are potentially large amounts of capital, debts, and liabilities involved in your business, and if building public visibility is an important feature of your business plan, you might choose to form a limited company over becoming a sole trader.
Choosing between a limited company and becoming a sole trader is also a common decision for freelancers who want to take advantage of some of the tax benefits limited companies can offer. But you need to weigh up whether those tax benefits are worth it for the extra administration and regulatory hoops you need to jump through.
Limited Partnership vs Limited Company
The main difference between a limited partnership and a limited company is the personal liability of the owners. For example, if a family is looking to set up a business, they may decide that they want to equally share the decision-making and liability between the family members.
To do this, they might set up a limited company, rather than a limited partnership. This way, each person becomes a director and shareholder of the company. Despite the additional tax and regulatory requirements compared to a limited partnership, the liability of each shareholder is limited to the value of their shares. This makes it a more attractive option.
What Kind of Business Will You Start?
It’s important to weigh up the features, advantages, and disadvantages of any business structure before deciding what kind of business you want to set up. Whether you’re starting a small business at home or setting up a large enterprise, hopefully this article gives you an overview of some of the considerations involved and helps you on your journey towards success!
If you want to find out more about starting a business, check out our other articles on the Sophical Blog.