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Which Legal Form Should I Choose For My Business?
There are three main types of legal forms to choose from when starting a business; but which is right for you?
When first starting a business, there are a number of different legal forms your business can take. The form which is best suited to you will vary depending on your own personal circumstances.
Here are the main legal forms:
Sole Trader
When starting a business, you can choose to be a sole trader which is not a legal form as such, you are simply self-employed. This is often a good option when just starting out, but you will have to keep in mind that personal assets wouldn’t be protected and you could therefore potentially lose your own possessions. Here are the pros and cons of being a sole trader.
Advantages:
- Simple unaudited accounts
- Low National Insurance
- Tax payments often lower than for a limited company
- No special setup; a single call to HMRC is usually enough
- Business can be transferred to a limited company at a later stage
- Private accounts – they are not publicly accessible
Disadvantages
- You are personally liable, so any personal assets would be at risk of being lost, should the company encounter debts
- It is much harder to raise money
- Fewer social security benefits entitlements
- Much harder to sell the business in comparison to a limited company
Limited Company
A limited company is a separate legal entity that acts in its own name. Once incorporated, a private limited company’s name is protected so that no one else can trade under this name and because it is a separate legal entity, the company can continue to trade regardless of whether the directors or shareholders change.
Advantages
- Limited liability: this limits your responsibility to the amount you have invested in the company and protects your personal assets
- More credibility: limited companies tend to be seen as more credible than sole traders, making it easier to do things such as raise money
- Easier to sell the business or part of it through shares
- Some tax benefits for high earners
Disadvantages
- The company must be registered through Companies House (however, we make this quick and easy for you)
- You must appoint at least one director who must be a person rather than a company
- You must take on legal responsibilities, such as the filing of your company’s Confirmation Statement and Annual Accounts
Limited Liability Partnership
Similarly to a private limited company, a Limited Liability Partnership (LLP) is a legal entity that acts in its own name. However, to form an LLP, you need two or more people and a partnership agreement must be drawn.
Advantages
- Limited liability
- Organisational flexibility of a partnership
Disadvantages
- Filing requirements, e.g. Annual Accounts, have very strict time limits
- Lack of financial privacy: the accounts tend to have to be disclosed
There are other legal forms of business, such as Right to Manage (RTM) and charities, but these tend to be for a more specific purpose. Read our comprehensive guide to company types.