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Company Structure

It’s very important to choose the most appropriate legal structure for your business when initially setting up the company. It can affect your degree of financial risk and the control you retain over the business. It can also be beneficial in terms of the amount of taxation the company is required to pay.

Various factors will determine the structure you should develop for your company, these being:

-   The size of the organisation
-   Number of employees
-   Who will have a share within the company
-   The industry and location of your business
-   Any obligations or pending judgements for current/previous businesses
-   The diversity of the business

Below details the common forms of company structure.

Sole Trader – This is an unincorporated business owned by an individual and is the simplest form of organisation. As a sole trader, you the business owner takes all responsibility for the organisation, giving you full risk and liable for all actions. On the flip side however you get to take all the profits.... providing you make any of course. As a ‘one man band’ you will be responsible for all aspects of the business so this will be limiting when the business in undergoing periods of growth. As a sole trader you will not get any benefits from tax, and will have to pay up to the maximum tax band depending on turnover.

A Partnership – this is a business established by 2 or more people. Each partner should contribute something to the business, this could be in the form of; investment, labour, skill, or property. Each partner then qualifies for a share of the profit based on the input invested. Each partner is liable for the company risk as with a sole trader.

Corporations – these are businesses where shareholders invest money or assets in return for shares (equity) within the company. Profits of the company are then distributed according to each shareholders equity. A key benefit of Corporations are that they have limited liability, which gives the company a separate entity from the owners (shareholders). The means that the shareholders will not be required to pay any more value than the shares acquired in the event of legal action or bankruptcy. A Corporation also benefits from special rates of tax (corporate tax) which can be attractive.

Benefits of limited liability include:

Risk avoidance – Risks that would normally be the responsibility of partners and sole traders become the responsibility of the company... this could save your home!

Anonymity - You can appoint nominee company officers and shareholders. No-one need ever know who is running the company.

Protection of name – You will not be permitted to register a company name with Companies House that is already in existence. Also if another name is registered and it is considered to be 'too like' another existing company the latter can lodge an objection with Companies House who can direct the new company to change its name. You may also want to consider UK Trademark protection of your company name

Ownership - Many of the problems of partnership are avoided such as defining who is in charge, as shares (equity) are distributed and form the legal structure.

Credibility – Have limited corporate identity can give you kudos in the market place.

Raising funds – A limited corporation may find it easier to raise capital for the business.

Taxation – Limited corporations have a reduced tax rates than that of sole traders / partnerships. If you reserve cash within the business this balance is only liable for corporate tax rate at 20% rather than the higher tax band of 40%. You can also benefit from tax free mileage for business purposes at a rate of 40p per mile (up to £4,000 per annum).

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