UK Private Business Structures: Advantages and Disadvantages of the Most Popular
The United Kingdom offers a variety of different types of company structures, each with its advantages and disadvantages, making them more or less ideal for the type of company you wish to set up. The best approach if you are interested in forming a UK company is to engage with a company that can assist you in determining the best structure for your corporate goals. By using a company that can offer quality advice and quality formations, you will be fully prepared to make the right decision. In the meantime, here are the most popular types of company structures with many of their advantages and disadvantages:
Private-Limited Company
A limited liability company is a separate legal entity to its shareholders and directors who cannot be held responsible for company actions unless there is proof of fraud. Private limited companies can have one or more shareholders, but shares cannot be sold publicly. Providing you don’t trade recklessly or fraudulently, as a director of a limited company your risk of loss is restricted to money you’ve invested in the company. However, you’re liable for bank loans if you provide personal guarantees for that limited company. A private limited company may be limited by shares or by guarantee. There are two popular types: Private Company Limited by Shares and Private Company Limited by Guarantee.
Private Company Limited by Shares (Ltd)
These structures can be used for the majority of commercial enterprises and with the generous protections to shareholders they offer, they are the most popular types of companies in the UK. Private Company Limited by Shares limit liability for shareholders to the investment they have made in the shares of the company. In the event this type of company would like to sells its shares to the public, it must re-register.
Private Company Limited by Guarantee
A Company Limited by Guarantee is a type of corporation used primarily for political parties, sports clubs and non-profit organisations that require legal personality. A company limited by guarantee does not usually have a share capital or shareholders, but instead has members who act as guarantors. The guarantors give an undertaking to contribute a nominal amount in the event of the winding up of the company. A company limited by guarantee can distribute its profits to its members if allowed to by its articles of association, but then it would not be eligible for charitable status.
Advantages
- Limited liability
- Greater availability to finance
- Specialisation can occur
- Limited Liability
- Protection from risk
- Possible reductions of tax bills
Disadvantages
- More complicated to set up – legal formalities
- Loss of individual control
Sole Trader
A sole trader or sole proprietorship is a company with only one employee. Setting up as a sole trader, is by far the easiest and quickest way to start a business. The paperwork is minimal and this structure doesn’t require paying a registration fee. Virtually anyone can register as a sole trader, although there are certain types of work that require obtaining a licence or permit from your local authority, such as taxi driving or trading.
Advantages
- You are your own boss
- You have total control of the company
- Greater latitude for types of business you can do
- Information about sole traders is kept private, unlike that of limited companies which is made public after registration
- You Keep all profits
- Easy to set up – few legal requirements
Disadvantages
- No liability protection
- Does not offer specified attributes
- Because of their structure, sole traders have a more difficult time raising money
Limited Liability Partnerships (LLPs)
An LLP is essentially a hybrid between a partnership and a limited company that allows business partnerships to enjoy the benefits of Limited Liability, while avoiding the problems of joint and several liabilities that apply to ordinary partnerships. A LLP is an innovative structure that can help owners benefit from the limited liability of a corporation while you are taxed only on your income as in a partnership. A LLP does not pay corporation tax.
Advantages
- All the members enjoy limited liability limited to the investment in the partnership
- Provides a for a more flexible management structure
- Transparent for tax purposes with members being taxed individually on their share of the limited liability partnerships income or gains
Disadvantages
- Usually have more set-up costs
- One cannot be a director if he is disqualified director or un-discharged bankrupt
- All owner information is public
- Complex, time consuming and expensive accounting and administration requirements
- Withdrawal of money form companies can be complicated
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