What types of company are there in the UK?
In the United Kingdom there are several different ways to legally establish your company and register to pay tax. The most common for a person to set up if they are self-employed or starting out in a small business are:
- Sole trader.
- Private company limited by shares.
- Partnership.
There are other types of company for larger organisations including:
- Public limited company (PLC).
- Company limited by guarantee.
- Unlimited company (UNLTD).
- Limited liability partnership (LLP).
- Community Interest Company (CIC).
What types of companies are best for small business start ups?
Creating a legal framework for your business is essential for all businesses. You might start as a sole proprietor and eventually want to grow into a public limited company. If you intend to set up on your own or with just one or two other people these are the most straightforward types of company to set up:
Sole Trader
If you are going to set up a business entity to trade with yourself as the sole proprietor, then you need to register as a sole trader. In this type of company, the registered business owner is responsible for the finances of the business, any assets and any debts. There are also responsibilities to keep accounts and submit a tax return. As a sole trader you get to keep all the profits and have to pay tax on them, but you also take liability for any loses that your business makes.
Private Limited Company
If you wish to set up a limited company where personal finances are separated from business finances, you will need to take on more responsibilities and liabilities. It is advisable to engage a company accountant. A limited company is a corporation, which gives the individuals involved liability for a fixed sum, equivalent to their investment. In a limited company, the liability of the members or subscribers of the company is limited to what they have invested or guaranteed to the company. A limited company has to be incorporated at Companies House as a legal ‘person’. A company that is limited is separate from its owners and can enter into contracts in its own name. The company as a legal entity is responsible for its own finances, actions and liabilities. The owners of the limited company are protected by limited liability. This means that they are only liable for debts to the value of their own investments or what they have guaranteed to the company. The owners are the shareholders.
Partnership
The legal structure of a partnership differs from that of a limited business entity. A partnership is a way for two or more people to set up a company together. In this type of company, the partners share the liability for the company debts. They also have accounting responsibilities. The partners share the profits and each pays taxes in their own share. This type of venture does not have to be between two people as Limited Companies count as legal entities and can also be a partner.
What types of company are suitable for larger business set ups?
There are other legal set ups that businesses can use in the UK if more people are involved, and if the businesses have grown to need a greater versatility in their day-to-day operation.
Public Limited Company (PLC).
Typically a PLC in the UK is a large well known business like a chain of retail shops or a large manufacturer. However a PLC can be formed by a single person, the set up gives limited liability protection and the company can sell its shares on the stock exchange or privately. Much like a private company limited by shares, a PLC is owned by its shareholders or a single shareholder. It is run by its directors, each of whom benefit from limited liability.
Company limited by guarantee.
Companies limited by guarantee are commonly used for charities, community projects, clubs and societies. Most companies limited by guarantee are not-for-profit companies. They do not distribute their profits to shareholders, but keep them within the company or use them for a different purpose. They need specialised articles to be drafted for their set up.
Unlimited company (UNLTD).
A less common set up is an unlimited company or private unlimited company. There are not very many of this variety of company registered with Companies House. An unlimited company must be set up as a private company. The main difference between these and limited companies is only really apparent in the case of insolvency. If the company goes into liquidation and lacks the resources to pay off debts, the personal assets of the unlimited company’s shareholder are open to creditors. All the shareholders bear joint, several and unlimited liability for the company’s liabilities. This is a level of risk that most companies avoid.
Limited Liability Partnership (LLP).
In limited liability partnership, the partners have reduced financial responsibility compared to in traditional partnerships. This might be more appealing to small businesses. Some or all of the partners have to have limited liabilities, meaning they are responsible for their own misconduct or negligence. They can work for the company as well as be directors.
Community Interest Company
Some businesses run as non-profit organisations. In this case consider setting 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. As with other kinds of business, CIC’s have limited liability.