Choosing the right business structure is one of the most important decisions you'll make when starting or restructuring a business. Each type comes with its own legal, tax, and operational implications, so it's essential to understand what works best for your goals.

Here’s our simple guide to the most common types of business structures, including the increasingly popular option of employee ownership.

Sole trader

A sole trader is the simplest business structure. It’s run by one person, who owns all the business assets and is personally responsible for its debts.

Pros:

• Easy and inexpensive to set up
• Full control over decision-making
• Fewer reporting requirements

Cons:

• Unlimited liability (personal assets at risk)
• Difficult to raise capital
• May be less tax-efficient

Partnership

In a partnership, two or more individuals share ownership of a business. Each partner contributes to the business and shares in its profits or losses.

Pros:

• Simple to set up and flexible
• Shared responsibility and expertise
• Easier to raise capital compared to a sole trader

Cons:

• Unlimited liability for all partners
• Potential for disputes between partners
• Joint liability for debts incurred by the business

Limited Liability Partnership (LLP)

An LLP combines features of a partnership with the benefits of limited liability. Partners (referred to as members) are only liable for the amount they invest in the business.

Pros:

• Limited liability for partners
• Flexibility in management structure
• Profits can be distributed as agreed by the partners

Cons:

• More complex reporting obligations than a traditional partnership
• Taxation similar to a partnership, which may not be as tax-efficient as a company
• Partner disputes can complicate operations

Limited company

A limited company is a separate legal entity from its owners (shareholders). It offers limited liability, which means the shareholders’ personal assets are protected.

Pros:

• Limited liability for shareholders
• Greater ability to raise capital
• More credibility with clients and investors

Cons:

• More complex to set up
• Greater regulatory requirements (e.g., filing annual accounts)
• Dividends are taxed separately from salaries

Public Limited Company (PLC)

A PLC is a limited company that can offer its shares to the public, usually through a stock exchange. It must have a minimum of £50,000 in share capital.

Pros:

• Ability to raise large amounts of capital
• Increased credibility and brand recognition
• Limited liability for shareholders

Cons:

• Expensive to set up and maintain
• Heavily regulated, with strict disclosure requirements
• Potential for loss of control through public ownership

Social enterprise

A social enterprise is a business that trades for a social or environmental purpose. Profits are typically reinvested into the business or used for a social cause rather than being distributed to shareholders.

Pros:

• Makes a positive social or environmental impact
• Can qualify for certain grants and tax reliefs
• Good for brand reputation

Cons:

• Can struggle to attract traditional investors
• Complex legal structures (e.g., Community Interest Company)
• Pressure to balance social aims with profitability

Employee ownership

Employee ownership is a structure where employees have a significant stake in the business, either directly (through shares) or indirectly (through a trust). This structure has gained popularity as it aligns employees' interests with the success of the business.

Pros:

• Increased employee engagement and motivation
• Potential tax benefits for both the company and employees
• Long-term sustainability as employees have a vested interest in the business’s success

Cons:

• Complex to set up (legal and financial advice is essential)
• Dilution of control for founders or original owners
• Can be difficult to exit or sell the business

Choosing the right structure

Choosing the right business structure depends on factors like your financial goals, the level of personal liability you're willing to accept, and how you plan to raise capital. If you're considering options like employee ownership or forming a limited company, it's wise to consult with a legal professional to ensure that your business is set up for success and compliance.

If you need assistance with the legal documentation for your business structure feel free to contact Sarah Naylor, Head of Commercial and Dispute sarah.naylor@switalskis.com or call 01302 320621 for expert legal advice tailored to your business needs.