What business types are there in the UK?

When setting up a business in the UK the common types of businesses that an individual with sole proprietorship can operate are Sole Trader, Limited Company or Partnership. There are other types of businesses for larger companies including public limited company (PLC), private company limited by shares (LTD), company limited by guarantee, unlimited company (UNLTD) and limited liability partnership (LLP). There are also community interest companies (CIC), not driven by creating profit for shareholders.

What type of business suits a small start-up?

There are numerous advantages to each type of business that might benefit a small business start up. The easiest way for a a self-employed person or a business in sole proprietorship to start is as a sole trader. For a number of reasons, however, a limited company or partnership arrangement may be suitable.

Sole trader

A sole trader is personally responsible for the business finances and any debts. They also have some accounting responsibilities. For example, they can keep all the profits, although they do have to pay tax on them. Sole traders are also personally responsible for any losses that their business makes

If you make more than £1000 in a tax year from self employment, can prove you are self employed and make voluntary National Insurance contributions, you can set up in sole proprietorship. You can register for self-assessment and file a yearly tax return and you have the choice to register under your own name or choose a name for your business.

Private limited company

A limited company (LTD) is a corporation where an individual has liability for a fixed sum, usually equal to the value of their investment. With a private limited company, unlike a sole trader, personal finances are separated from business finances, and there are more reporting and managing responsibilities involved

Although you can set up the company yourself, it is advisable to use an accountant.

Partnership

A partnership is a straightforward way for two or more people to set up a business together. In a partnership the partners share liability for the company’s debts and have accounting responsibilities. Partners share the profits and each pays tax on their share. This joint venture does not have to be between two individuals, as an incorporated (limited) company counts as a legal entity and can also be a partner.

Community interest company

Some businesses run as non-profit organisations. In this case, it is possible to set up a community interest company (CIC). This is a business structure created by businesses not driven by maximisation of profit for their shareholders, rather they have the intention of using their assets and profits for the good of their communities.

Business owners who have the intention of improving the services they offer to the community usually set up this kind of business entity. CIC’s, like a number of other business types, have limited liability.

Which type of business would be best for entrepreneurs growing their company?

Those with sole proprietorship looking to set up a business for profit may eventually outgrow the advantages of smaller business structures. In the day to day running of your business, growth may exceed a point where personal liability is advisable. Businesses in sole proprietorship would could therefore expand to include a general partner, or instead enter into a limited liability partnership.

Depending on the investment required for your business and the number of investors involved, you might want to look at a long term plan and set up a joint venture with another person, or company, or eventually offer shares to the public. As the company grows, it may become prudent to change the business structure.

To incorporate as a limited company after sole tradership, you will need at least one director and at least one shareholder; the ownership is then with the shareholders and you cease to have sole proprietorship. Further requirements would be that the ‘new’ company agrees to abide by the rules and to create a memorandum of association and articles of association:

• The memorandum is a legal statement signed by all the initial shareholders agreeing to form the company.
• Articles of association are written rules about running the company agreed by the shareholders.

Be aware that members of the public cannot own shares in a private limited company. Instead, it is owned by a relatively small number of shareholders, or by a non-governmental organisation (NGO), with the sale of these shares handled in private.

What other types of business are there in the UK?

At the larger end of the scale, there are some other possible options for business registration:

Limited liability partnership

A limited liability partnership (LLP) is treated as an incorporated body. For a business to be a limited liability partnership, some or all of the partners have to have limited liability, which means they are only responsible for their own misconduct or negligence, rather than being responsible for the other partners as a collective. Unlike in other corporations, the partners in a limited liability partnership are allowed to directly manage the business. In other types of company the shareholders have to elect a board of directors and that board employs other people to manage the company.

Limited liability partnership in the UK is slightly different to the US concept of a limited liability company, in that in the UK the partners still have personal liability.

Public limited company

A public limited company (PLC) is a combination of a public company and a limited company. The ownership of a public company is open to the public through the purchase of shares in the company’s stocks. Anyone can become a shareholder and they are responsible for the company’s financial liabilities to the extent of their own investment.

Before a PLC can start business it must have shares with a total value of at least £50,000 allotted.