Business Ownership Structures

Selecting the right Ownership Structure is important, both at start up and also when significant change is being contemplated.

Here is a brief summary of different Ownership Structures:
      Private Limited Company
      Sole Trader

      Partnership

      Limited Liability Partnership (LLP)

      Public Limited Company (Plc)
 

Private Limited Company

The Private Limited Company is still the 'norm' for entrepreneurs.  This structure means that the Shareholders have their liability limited to the amount of Share Capital invested.  The Limited company gives the business a 'life' separate from the founder, enabling it to enter into contracts, borrow funds and ultimately sell the business to new owners or shareholders.

While the Limited Company currently has tax advantages, there are additional costs of compliance, namely the requirement to file Annual Accounts at Companies House.  In addition the limited liability can be removed by the courts in certain situations such as if the Directors have been trading fraudulently (not knowing how they will be able to meet their debts as they fall due).

The private Limited Company structures do allow for fresh shares to be issued to incoming investors, so accommodating Angel or Private Equity investors (see Raising Business Finance).  Also employees share schemes can be useful.

Sole Trader
This is the simplest business structure.  If a person sets up a business on his own, then he or she would be deemed to be a Sole Trader.  The business Income and Expenditure are treated as the person's personal income and expenses, which then translates to the Tax which is payable, even his or her income level puts them into a high tax band such as 50%.

For businesses which are medium sized or which have grown out of the 'small' category, the Sole Trader status may no longer be appropriate.  Changing status from Sole Trader to Limited Company can present some tax planning advantages which is often worth reviewing. Contact us to discuss this.

Partnership
Where two or more principals start in business together, they would be regarded as being in 'Partnership'.  From a tax perspective the Partners would be taxed individually on the same basis as if they were a Sole Trader (see above).  This does give advantages of flexibility and the ability to relatively easily introduce new Partners and even retire existing partners.

The main disadvantage of Partnerships is that all partners will be jointly and severally liable for any liabilities that are incurred.  This means that one Partner could be sued for the wrong doing or poor advice as provided by another Partner in the firm.

Limited Liability Partnerships (LLP)
Limited Liability Partnerships have the advantages of Partnership while removing the problem of joint and several liabilities.  Although costly to set up, LLPs have in the past been adopted by some Accountancy and Legal practices as a better structure than the conventional Partnership.

Whilst LLPs are the 'norm' within certain sectors, these are not yet mainstream and so businesses adopting them may need to do more explaining than if a Limited Company.  In addition LLPs also have the disadvantage of partners being taxed on their share of the partnerships net income.

Public Limited Company (Plc)
A Public Liability Company (Plc) is normally a company which is quoted on a recognised stock exchange and the shares available for purchase by individuals.  The listing on a recognised Stock Exchange enables the Plc to raise significant levels of funding from investors.  The listing may also enable existing shareholders to sell their shares.  The listing process is detailed and relatively costly during the period of flotation; however subsequent fund-raisings can be achieved at a lower cost, providing the business has a good track record, sound Management and experienced advisers.

However a Limited Company can convert to Plc status and still not be listed on a Stock Exchange.  Converting to Plc status involves having a minimum of £50k of Share Capital, which then gives the Plc the option of a flotation on a stock market such as AIM, however such a company need not opt for a full 'float'.  Some companies trade as Plc status for years without progressing to a fully quoted basis.

How to choose the Right Structure?
Our vfdnet part time Finance Directors work with clients and specialist tax planning accountants to achieve the right structure for each business owner and employee team.

Why not Contact US for a no obligation free of charge initial discussion?

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