Category Archives: Company Legal Structure

Company Legal Structure

When setting up in business it’s important to know what structure you’ll have for your company, as this determines:
– 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.

I’ll go through the 3 most common structures you get and how each is defined. As I’m blogging from the UK, it will mostly be about UK company structures, however, I will try and include other countries too.
Please note>> this is information based on research I have done, and every best effort has been made to keep it accurate, however, you should always check with a legal professional before finalising plans. This information has been taken from the BusinessLink website<<

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Sole trader
Being a sole trader is the simplest way to run a business: it does not involve paying any registration fees, keeping records and accounts is straightforward, and you get to keep all the profits. However, you are personally liable for any debts that your business runs up, which makes this a risky option for businesses that need a lot of investment.

Set-up
You need to register as self-employed.
Management and raising finance
You make all the decisions on how to manage your business.
You raise money for the business out of your own assets and/or with loans from banks or other lenders.
Records and accounts
You have to make an annual self assessment tax return to HM Revenue & Customs.
You must also keep records showing your business income and expenses.
Profits
Any profits go to you.
Tax and National Insurance
As you are self-employed, your profits are taxed as income.
You also need to pay fixed-rate Class 2 and 4 National Insurance contributions on your profits.
Liability
As a sole trader, you are personally responsible for any debts run up by your business. This means your home or other assets may be at risk if your business runs into trouble.

Partnership
In a partnership, two or more people share the risks, costs and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.

Set-up
Each partner needs to register as self-employed employed.
It’s a good idea to draw up a written agreement between the partners. For further advice, consult an accountant or solicitor.
Management and raising finance
Partners themselves usually manage the business, though they can delegate responsibilities to employees.
Partners raise money for the business out of their own assets, and/or with loans.
It’s possible to have ‘sleeping’ partners who contribute money to the business but are not involved in running it.
Records and accounts
The partnership itself and each individual partner must make annual self-assessment returns to HM Revenue & Customs (HMRC).
The partnership must keep records showing business income and expenses.
Profits
Each partner takes a share of the profits.
Tax and National Insurance
As partners are self-employed, they are taxed on their share of the profits.
Each partner also needs to pay Class 2 and 4 National Insurance contributions.
Liability
Creditors can claim a partner’s personal assets to pay off any debts – even those debts caused by other partners.
In England, Wales and Northern Ireland, partners are jointly liable for debts owed by the partnership and so are equally responsible for paying off the whole debt. They are not severally liable, which would mean each partner is responsible for paying off the entire debt. Partners in Scotland are both jointly and severally liable.
However, if a partner leaves the partnership, the remaining partners may be liable for the entire debt of the partnership. Also, a creditor may choose to pursue any of the partners for the full debt owed in the case of insolvency.

Limited liability companies
Limited companies exist in their own right. This means the company’s finances are separate from the personal finances of their owners. Shareholders may be individuals or other companies. They are not responsible for the company’s debts unless they have given guarantees (of a bank loan, for example). However, they may lose the money they have invested in the company if it fails.

Main types

  • Private limited companies can have one or more members, eg shareholders. They cannot offer shares to the public.
  • Public limited companies (plcs) must have at least two shareholders and must have issued shares to the public to a value of at least £50,000 before it can trade. View the guide to company formation at the Companies House website – Opens in a new window.
  • Private unlimited companies – these are rare and usually created for specific reasons. It is recommended you take legal advice before creating one.

Set-up

  • Must be registered (incorporated) at Companies House.
  • Must have at least one director (two if it’s a plc) who may also be shareholders. Directors must be at least 16 years of age.
  • Private companies are not obliged to appoint a company secretary but if one is appointed this must be notified to Companies House. Public limited companies must have a qualified company secretary.

Management and raising finance

  • A director or board of directors make the management decisions.
  • Finance comes from shareholders, loans and retained profits.
  • Public limited companies can raise money by selling shares on the stock market, but private limited companies cannot.

Records and accounts

  • Accounts must be filed with Companies House before the time allowed for filing those accounts to avoid a late filing penalty.
  • Accounts must be audited each year unless the company is exempt.
  • When you file your Annual Return for the first time a letter will be issued to the Registered Office containing the company’s authentication code and instructions for use of Companies House web filing services. Please follow the instructions in the letter.

You can find out about company accounts on the Companies House website – Opens in a new window.

Directors are responsible for notifying Companies House of changes in the structure and management of the business.

Profits

  • Profits are usually distributed to shareholders in the form of dividends, apart from profits retained in the business as working capital.

Tax and National Insurance

  • If a company has any taxable income or profits, it must tell HM Revenue & Customs (HMRC) that it exists and is liable to corporation tax.
  • Companies liable to corporation tax must make an annual return to HMRC.
  • Company directors are employees of the company and must pay both income tax and Class 1 National Insurance contributions on their salaries.

Liability

  • Shareholders are not personally responsible for the company’s debts, but directors may be asked to give personal guarantees of loans to the company.

For more information and a guide to franchises and social enterprises, click here.

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The following factors should be considered in choosing which entity is appropriate for any business. Generally, the first two — limitation of personal liability and tax planning — will control the decision, but in particular circumstances other criteria may be most relevant. There is rarely a single “right” or “wrong” answer but rather a weighing and balancing of the benefits and disadvantages of different entities to achieve the desired goals listed below.

Generally, a business owner will choose an entity that offers limited liability protection. Nonetheless, liability protection may not always be the deciding factor. Some businesses have no real liability exposure or exposures which can be limited by reasonably priced liability insurance. The business or its owners may not have meaningful assets at risk, either because all is invested in the business or through “asset protection techniques” (e.g., joint ownership with a spouse, special types of trusts, offshore ownership, etc.). Consider the following factors:

– How likely are large, uninsurable liabilities in your line of business?
– Do you have liability exposure to personal injury plaintiffs, commercial creditors, or financial or contract risks?.
– Is sufficient liability insurance available at reasonable rates for your likely liabilities?
– Is the amount of assets to be owned by business entity and available for creditors worth the cost of protection?
– Do you have personal assets that would be worth protecting if they became available for creditors?

Sole Proprietorship

A proprietorship is perhaps the simplest form of entity, but in many cases the riskiest — nothing more than you, individually, doing business (whether under a trade name or not) without additional filings. Some examples include a paper route, lemonade stand or self-employed consultant. This simplicity provides the proprietorship’s greatest advantage: little paperwork or legal planning is required, taxes are reported on your personal return (but on a separate form), profits and losses come out of your own pocket and you, alone, make all the decisions.
Taxation of business revenue is consolidated with the personal return of the proprietor at individual tax rates. There is no separate taxation of business income or other business-related tax attributes. Additional excise or business-related taxes may be imposed in some local political jurisdictions.

Partnerships

Despite the formal, legal name, a partnership operates like a proprietorship conducted by two or more people. For example, if a sibling or friend ever helped you with your lemonade stand or paper route, and you split the profits, you had a partnership. Partnerships come in two types: general partnerships, in which creditors can collect from all partners’ personal assets (as well as the business assets), or limited partnerships, in which partners who agree not to participate in management limit their loss exposure to their investment in the business. Every limited partnership must have at least one personally liable general partner, although often the general partner can be a corporation or another limited partnership to control the risk.

As with proprietorships, the greatest benefit of a partnership is pass-through taxation. The entity does not pay tax itself, other than certain excise or franchise taxes. Instead, all tax attributes (income, losses, deductions, credits) can “pass through” to individual partners for use in their personal tax returns at individual tax rates.

General partnerships

You can have a formal, written partnership agreement or choose to be an “at will” partnership, with only an oral understanding. An “at will” partnership is simply two or more persons conducting business together under terms of an unwritten agreement (although the Uniform Partnership Act provides many “default terms” for the relationship) that any partner can terminate at any time, for any reason. A written partnership agreement specifies terms more precisely, including termination conditions, division of profit and loss, division of responsibilities for the conduct of business, etc.

Corporations

Corporations, the most common form of organization for large businesses in the United States, require complex legal paperwork, in exchange for a major benefit for large and small firms and their owners. Creditors of a corporation cannot collect from the personal assets of the owners, the “shareholders.” Instead, creditors are generally left with only the corporate assets, if any remain.

Liability is limited to assets that are owned by the corporation, with no personal liability of shareholders, officers, directors or employees, except in certain regulatory areas or as a result of the failure to maintain corporate form (also known as “piercing the corporate veil”).

Corporate profits are taxed twice — once in the hands of the corporation and again upon distribution to shareholders as dividends. Tax planning concerning corporate expenses can mitigate double taxation.

Unlike the lemonade stand and paper route examples, corporations do not come into existence haphazardly. A formal document, the “Articles” or “Certificate” of incorporation, must be filed in the state capital. After filing, the investors elect a board of directors to govern the business and adopt bylaws to establish rules. The board then picks officers — a president, secretary and treasurer — to run the day-to-day aspects of the business. Corporations doing business in more than one state must comply with registration requirements in each location.

For more information and advice, go here please remember to check with a legal professional before taking action

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