Creating a company
To put your business on a proper footing with HM Revenue & Customs and other authorities, you need to make sure that it has the right legal structure. It's worth thinking carefully about which structure best suits the way that you do business, as this will affect:
- the tax and National Insurance that you pay
- the records and accounts that you have to keep
- your financial liability if the business runs into trouble
- the ways your business can raise money
- the way management decisions are made about the business.
Types of company
There are several structures to choose from, depending on your situation. These include:
| Type of company | Advantages | Disadvantages |
|---|---|---|
Sole trader | Independence | Lack of support |
Ease of set up and running | Unlimited liability | |
All the profits go to you | Personal responsibility for debts | |
Partnership | Ease of set up and running | Disagreements between partners can cause problems |
Partners bring a variety of skills and experiences to the business | Unlimited liability | |
| Personal responsibility for debts | |
Limited liability partnership (LLP) | Flexibility of a partnership | Must be at least two designated members and the law places extra responsibilities on them |
Personal liability is limited | More complex and costly to set up than a partnership | |
| Disagreements between partners can cause problems | |
| If the partnership reduces in number and there are fewer than two designated members then every member is deemed to be a designated member. | |
Limited liability company | Personal financial risk is restricted to 1) how much you invest and 2) guarantees you have given to obtain financing | Extra legal duties like maintenance of the company’s public records and account filing |
Limited by guarantee | Does not have a share capital or shareholders | Usually formed to manage a charity or not for profit organisation such as a sports club or political party. |
| Usually formed to manage a charity or not for profit organisation such as a sports club or political party. | |
Franchise | Takes advantage of the success of an established business and support networks. | Freedom to manage the business is limited by the terms of the franchise agreement. |
| Franchisees often pay a share of their turnover to the franchiser, which brings down overall profits. |
Our favourite links
businesslink.gov.uk The Business Link guide to legal structures will help you choose and set up the right legal structure for your business. There's lots of information about the different structures, and a handy interactive tool to help you make your decision.
bytestart.co.uk Bytestart has useful information on choosing a legal status for your business.
Other useful links
companieshouse.gov.uk If you choose to form a company, you'll need to register with Companies House. The guide to company formation will help you understand what you need to do to register your new company. Many people decide to use a solicitor, accountant or a company formation service to help them with this process.