Business Essentials: Understanding the Common Types of Business Structure
When you choose to begin your business, there are various decisions you have to make. One of the fundamental decisions is about the kind of business structure you want to adopt. For you to choose rightly, you need to understand how each business structure operates. It’s also paramount to have an idea the benefits and limitations associated with the different business models.
If your business idea doesn’t require a huge amount of capital to be raised through the stock exchange, then you won’t need to list your startup as a public limited company. You are probably considering four main options: sole proprietorship, general partnership, a limited liability company and limited liability partnership.
- Sole Proprietorship
A sole proprietorship is a good starting point for an entrepreneur who has no possible source of high capital. A sole trader can hire other staffs. However, the engagement needs to be within the set rules and regulations.
The main pro of operating solo is that you own your decisions and can implement them instantly. No board meetings or back and forth discussions which derail business decisions and progress. Additionally, all profits belong to you. Other benefits include:
- Simple to register – many startups begin here
- Inexpensive – doesn’t require any fees or levy to register
- Low capital requirements
- Fewer legal obligations or government control
- Simple taxation procedures and other tax benefits
- Fewer book-keeping and administrative demands
- Unlimited personal liability – personal finances can be seized to pay business debt
- Lack of continuity in case the owner is unable to run the business
- High tax rates in case the business grows beyond £41,865.
- Owner bears all the risks alone
- General Partnership
In many cases, a partnership occurs as an extension of a sole proprietorship. For instance, two or more people who know each other properly decide to raise funds, share duties, and profits of a venture. They’ll draw an agreement detailing how the ownership, profits, and liabilities of the business are shared.
- Business continues even when one is sick or off-duty for whatever reason.
- Shared responsibilities in raising funds, bearing loss, and running the business makes things easier
- Each party registers as self-employed and files tax returns separately.
- All partners bear responsibility for debts of the business – even if one partner incurred the debt
- It’s unlimited partnership – each individual’s profit is taxed as personal income
- Profits over £5,885 meet class 2 National Insurance Contribution.
- Limited Liability Company
A limited liability company can be formed by one or more partners via a written agreement. The partners can be individuals or entities. Ownership is by shareholders, each limited by the amount of capital they inject.
- It is easier to borrow finances for the business
- Exposure on personal finances is less
- Can get contracts from corporate clients
- Your business appears more credible
- Enjoys fair tax plans
- Strict regulatory and management demands
- Has to declare annual financial reports and business accounts to the public
- Limited Liability Partnership
This kind of business model operates just like a general partnership but for the fact that partners have limited liability. This means, one partner cannot bear responsibility for the other’s negligence whether affecting the business or not. It is a common model for partnerships between professionals like accountants and lawyers.
- Introduces flexibility enjoyed by general partnerships
- Partners enjoy protection of their assets just like shareholders in limited companies
- No limits to the number of shareholders
- Partners are required to divulge their income
- Taxation is applied to each partner’s share of profit as personal income
- Mandatory member’s agreement showing the amount of profit share received by each partner
- If you register a company name as an LLP, you must begin trading within the first year.
Now that you have an idea about the pros and cons of each kind of business structure, you can always consider the easiest model for your startup. Furthermore, it’s very easy to change to a new structure as you progress.