In the UK, different business types have different impacts on corporate nature. Whether you choose to set up a private limited company, partnership, or do business on your own, the right entity type will build a solid foundation that supports your business’s greatest potential.
1. Most common business entities in the UK
The business structures in the UK are classified according to three primary factors: ownership, tax implication, and liability. Here’s a quick look at the differences between the 3 most common types of entities:
Sole proprietorship – The simplest option of the three, which offers complete managerial control to its owner. Despite the simple setup, a sole proprietor is normally tied to personal assets, meaning you could lose personal property and savings to pay for any lingering debt.
Partnership – A partnership involves two or more people agreeing to share in the profits or losses of a business. As easy as it is to form, it is equally easy to get into trouble since you are jointly liable for all the debts or negligent acts from your partners. Partnerships in the UK are subject to “pass-through taxation”. This means that the partnership is not itself liable to tax. Instead, the legislation taxes the partners directly on their share of income.
Private limited company (LTD) – The LTD is probably the most popular business structure in the UK, accounting for 92.8% of total entities. An LTD exists in its own right as a separate entity and offers personal liability protection to its owners. No matter what happens to the company, business owners can rest assured that their assets are fully protected.
Among other types of business in the UK, LTD is considered one of the best entity structures around, especially for SMEs and startup owners in terms of personal assets protection and favorable tax regime.
The following section gives you a closer look at LTDs’ advantages as well as the requirements for private limited company formation in the UK.
2. Advantages of a private limited company in the UK
An LTD is a separate legal entity with its own assets and limited liabilities. Overall, the advantages of private limited companies in the UK include:
Personal liability protection – Any outstanding debts and liabilities cannot affect you personally. You can rest assured that no matter what happens to your business, your personal properties are safe.
Flexible structure – An LTD can be collectively owned by as many as 50 people. You can arrange ownership – any person, partnership, even corporation can be the owner. You can decide what percentage of the profits to give to whom, and assign the scope of each manager’s power to deal with business’s day-to-day affairs.
Professional status – Forming an LTD can add valuable prestige and credibility to your business. This is due to the fact that they are much more thoroughly monitored than other structures, with compliance obligations and reporting requirements in place. Adding Ltd after your name helps reassure your clients that you are legit and official.
Funding opportunities – Due to the more ‘official’ nature of incorporation, LTDs may find it easier to secure funding from banks and private investors than sole proprietors.
Tax benefits – Forming LTDs guarantees a favorable tax regime to your company, paying 19% corporation tax on profits. Plus, LTDs’ dividends are not subject to National Insurance Contribution, meaning the owners can take home more of their income from the business in the form of dividends.
3. Disadvantages of a private limited company in the UK
Personal information disclosure – When forming an LTD, a wealth of information is displayed on the public record (via the Registrar of Companies), which increases the risk of disclosing private information of the owners and the LTD itself.
Strict record-keeping procedures – LTDs are required to adhere to strict bookkeeping practices, including taking minutes of meetings and recording all decisions taken by directors and shareholders.
Name restrictions – LTDs’ names are subject to certain restrictions and must be registered and approved by the Companies House.
Difficult money withdrawal – An LTD is a legal entity in its own right, which means the assets and profits belong to the company, not the owners. Therefore, the money cannot be easily taken out of the business. Unlike a sole trader, whose personal and company’s assets are one and the same.
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