Creating a Company — Where to Start

There are four main types of company structure in the UK, each has both Pros and Cons, and different Tax and Liability implications for those involved. The four main types are:

• Sole trader
• Limited company
• Partnership
• Limited liability partnership

A brief description of the different arrangements is as follows – these are not fully definitive descriptions, but a brief guide!

Sole Trader

If you are self-employed and working for a contractor you are already operating as a sole trader. You should be registered with HMRC as self-employed, and you should submit an annual self-assessment. If you work in construction you should also register with the CIS. As a sole trader you are required to keep business records and record your business expenses. You can choose a trading name, but you must not advertise yourself as Ltd, Plc, etc. Public liability insurance is also a good idea, and you can engage both employees, or other sub-contractors as your business expands.

The advantage of being a sole trader is that it is the simplest form of business, and has very little cost associated with the set-up of your business. The down side is that you are personally responsible for any debts that you might run up in the name of your business.

Limited Company

The majority of businesses in the UK operate under a limited liability structure. The basic principle of the structure protects individuals within the company – Office Holders, Employees and Shareholders from any personal liability associated with the companies failure or associated debts. A companies “Office Holders” are generally its Directors and the Company Secretary. There are a couple of exceptions to that liability protection – for instance if a Director has acted illegally, or is responsible for the losses through the significant neglect of their duties.

Limited companies are usually privately owned – those that offer their shares for trade on the stock exchange are Public Limited Companies. Limited companies are bound by their articles of association – a set of rules and guidelines that regulates how the company operates. Ltd companies are required to hold insurance, a company bank account, they are required to submit annual accounts to Companies House, and to keep detailed company records.

The advantage of a Limited company is the protection afforded against any personal liability for the shareholders and Directors from business failure. It is also the professional structure through which most companies do business. The disadvantages include significant rules and guidelines, plus greater administration and banking costs.

Personal Service Company (PSC)

Structurally, a Personal Service Company is the same as any other Private Limited company. However, before 2008 a Limited company was required to have two separate individuals as office holders – at least one Director plus a company secretary. Now one person can be both – so a company can consist of one person, and these “micro companies” are generally referred to as Personal Service Companies, although the company can still have multiple shareholders; all of the governance rules of a Ltd company apply to a PSC, but this is the type of structure targeted by the IR35 legislation.

Partnership

Partnerships are, as you might imagine, made up of at least two equal partners! The easiest way to consider partnerships is to think of them as a joined association of sole traders. The partners share the responsibility for running the company, so there are no shareholders or Directors. Again, as a trading business it would need a separate bank account and insurance, but because the partnership does not technically have a legal status this is not a legal necessity: the partners must, however, register as self-employed with HMRC, and follow rules for the self-employed sole trader.

The advantages of a partnership is that it’s easy to set up – you can start trading with little more than a handshake, although a written partnership agreement is strongly recommended! The disadvantages, much like a sole trader include unlimited liability for the company’s debts.

Limited Liability Partnership (LLP)

Again, much like the difference between a Sole Trader and a Limited Company, a Limited Liability Partnership is a separate legal entity from its members (partners), who are only liable for the amount of money they invest, plus any personal guarantees. The partnership is incorporated at Companies House, and can only be used by profit-making businesses.

The advantages of an LLP include as well as the financial protection, a legal distinction where each partner is only liable for their own actions and not those of the other partners. This means that if one partner is sued, the other partners will not be held liable. The disadvantages also include the cost of administration, a fair bit of legal governance and reporting responsibilities, etc.