How to pick the right company type for your start-up

Author
Anna Lemos
Content and Social Media Executive | Company Formations 24.7
16th May 2016

When it comes to starting a business picking the right company type can seem like a bit of a minefield. Are you a private company? A public company? Will you have shareholders or are you a non-profit organisation? 

You may only be at the early stages of starting up but your business needs a structure and this choice will have an impact on your business in the future. 

It’s easy to be overwhelmed with information, but a little research and this handy guide to the most common company types should give you an idea of which company type is right for your business. 

What impact does a company structure have on a business? 

The company structure that you choose can have a large impact on your business and the way that it is run. It will affect how much you pay in tax, what personal liability you face, whether you hold sole responsibility for the business or if you have to report in to shareholders, how much you personally take in profits and also the amount of paperwork that you are required to do. 

It may be tempting to go down a route which increases the amount of profits you can keep, but with this  comes a greater responsibility and liability, which equates to an increase in risk. 

We look below at the different types of company structures and what each will mean for both you and your business. 

Sole Trader 

Sole traders are the most common forms of business structure as they are inexpensive to set up, easy to maintain and require very little paperwork. You’ll have complete control of the business and can keep all the profits that you make. However, with this comes an added level of responsibility as you are personally liable for any losses that your business suffers. 

You can still hire employees as a sole trader, but you'll need to fill out a HMRC Self-Assessment form each year for taxes. With this type of business structure it is likely that the company will no longer exist beyond the death or retirement of the owner, unless they pass ownership on. 

Business Partnership 

A business partnership is similar to a sole trader, except the responsibility is shared amongst you and your partners. This means that you’ll share all profits of the business between you, as well as the responsibility of the business. It’s easy to set up in this way and also helps to keep costs low.

However, both you and your partners will be liable for any losses that the business makes, with each partner liable for both their own debts as well as all of the debts of the business. There is, of course, the risk of disagreement amongst multiple partners. 

Public Limited Company 

A Public Limited Company (PLC) is the legal title of a business that offers shares to the public and also has limited liability. The stock of a Public Limited Company can be obtained by anyone and those who hold shares can only lose the total amount that they originally paid for. In order to form a public limited company, two people are required. 

Public limited companies can be listed on the London Stock Exchange and are required to have the suffix PLC placed after the company name. The main requirements of a PLC are that it is registered as a public company but it must have a minimum of £50,000 of share capital. 

Limited by Guarantee Company 

A limited by guarantee company is generally set up by non-profit organizations that wish to obtain corporate status. Limited by guarantee companies commonly keep their profits in the company so that they can reinvest in the way the business operates instead of giving any profit to members. 

This type of company does not have any share capital or shareholders but it does have members who can make up any shortfall that the company may be experiencing in order to deal with any debts. Commonly, a limited by guarantee company is usually used by charities, clubs and community enterprises. 

Limited Liability Partnerships

A limited liability partnership (LLP) is a cross between a standard business partnership and a company. In an LLP, each partner has liability up to the amount of their investment which is different to that of a conventional partnership. LLP is a separate entity but profits are taxed on each partner. 

An LLP requires two or more members but there is no limit set on the amount of members it can have. An LLP is expected to follow the same rules as a private limited company. This is a relatively new concept but it is growing in popularity and has been embraced by the construction industry as well as pharmacies and garages. Even, professionals such as accountants, solicitors and surveyors are now turning to LLPs. 

Other business structures 

Flat management companies:

Similar to private limited companies, flat management companies are set up to hold properties that have been split into several units to create flats or apartments. 

Ready-made company:

This is a company that has already been set up but has not actually started trading yet. These are set up in preparation for a sale at a later date and are maintained correctly with all fees paid and paperwork completed up until the company is purchased. 

Charitable Incorporated Organisations (CIO):

A new form of charitable organization, a CIO makes it possible for charitable ventures to operate more efficiently than standard charitable companies because the regulations in place have been simplified. 

Community Interest Company (CIC):

This is a limited liability company that has been created solely for the benefit of a community. It’s a new structure brought in as a way of assisting social enterprises or projects that are non-profit. 

Conclusion

So, as you can see, there is a lot of choice when it comes to choosing the right structure for your business. 

Knowing exactly what your business will do and understanding what you want to achieve in the future will help you decide how your business should operate.  Don’t let it worry you, simply analyse what your business is aiming for and you’ll soon realise which structure is the best fit for your business.

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