Legal forms and structures: all you need to know
This article will give you brief but concise information about the types of legal forms there are in the UK and why they are important or not.
A team of experts will get you the answers you need to get started with your business.
Before you start thinking this is another group of forms to be filled and sent to a particular government agency, you may want to take a breather. Legal forms are basically the forms of business setups in the UK and in can be incorporated or unincorporated forms.
Your business must take on a legal form for it to be registrable with the government and for it to be a legitimate business entity.
What are legal forms?
Legal forms are the legal formation of businesses that could either be unincorporated or incorporated. They can also be referred to as the legal structure of businesses.
The importance of choosing the right legal form for your business cannot be overemphasized because it gives your business identity such that it can either be regarded to be the same as you or a separate entity by itself. Why that is something of importance will be discussed later in this article.
It is however important to point out here that the government agencies that want to know the legal form of your business are either the HM Revenues and Customs, Companies House, or both.
Types of Legal forms
There are two general types of legal forms for business in the UK – unincorporated and incorporated legal forms:
1. Unincorporated legal forms:
These are unincorporated because they are not separate legal entities from their owners. There are five types of unincorporated legal forms through which you can structure your business. The details are below:
- Sole Trader – in the UK, this legal structure is the simplest form of business and it does not require preregistration before commencing business. As the name implies, being a sole trader means that you started the business all on your own but it does not mean that you cannot employ people to work for you. So, as a sole trader, you can be an entrepreneur who employs staff and pay them using the PAYE scheme. Since is an unincorporated structure, there is no need to register with the Companies House but you will need to register your business with HMRC to pay tax through the Self-Assessment scheme.
- Unincorporated Association – this is an association that is not registered as an incorporated legal entity. The association is formed based on contracts or agreements and is governed by a managing committee. Just like the sole trader, they are not registered with the Companies House. Also, except it is clearly stated in the association constitution, all members have unlimited liabilities.
- Business Partnership – the partners in a business partnership can be two or more but unlike an incorporated business, the partners share the liabilities of the business. In other words, the partners and the business are seen as the same. The partners also pay their taxes to HMRC through Self-Assessment individually and they do not have to register with the Companies House. One good thing about the business partnership is that there are more people to raise capital, unlike the sole trader who has to do it all alone.
The other two forms must be registered with the Companies House.
- Limited Partnership – this is not the same as a Limited Liability Partnership and the difference is that it is not incorporated. The Limited Partnership has two types of partners namely the limited partners who may or may not be involved in the day-to-day activities of the company, and the general partners. Unlike a business partnership, a Limited Partnership must be registered with the Companies House before commencing business and also inform them if there is any change to the company.
- Trusts – trusts are unincorporated and are set up to hold onto cash or real estate assets for an individual or a group of people. A trustee or board of trustee manages such assets and are tasked with administering them to the owners whenever due. As a rule, trustees are personally liable to the trust and they are not allowed to distribute its profit either. They just manage the trust on behalf of its beneficiary.
2. Incorporated legal forms:
The incorporated legal forms are legally separate legal entities from their owners who thus have limited liability, unlike the unincorporated forms. The legal structures under this form include the limited liability company, limited liability partnership, community interest company, community benefit society, charitable incorporation organization, and industrial and providence society. Below are a few details you should be aware of about each of them.
- Limited company or limited liability company (LLC) – this is a company limited by shares or guarantees and it can be a private or public limited company. The company is guided by the articles and memorandum of association and it must be incorporated with the Companies House before it can commence business. Since a limited company can have one shareholder or guarantor and one director, and one person can be both at the same time, a sole trader can register his company as a limited liability company. That way, the company is a separate legal entity from the owner or owners. However, if he ever wishes to take the company public, he has to take on at least one more director to make two that are legally required for such an endeavor.
The LLC pays corporation tax to the HMRC and each partner or guarantor must pay tax through Self-Assessment if they are being paid by the company.
- Limited liability partnership (LLP) – the limited liability partnership also consists of partners like a business partnership but unlike it, the LLP is an incorporated company that is a separate entity from the partners. Just like the business partnership, each member of the LLP and the LLP itself must register to pay tax through Self-Assessment. And like the LLC, an LLP must also file a statement of accounts and statutory statements with the Companies House every year.
- Community interest company (CIC) – this company can either be limited by shares or guarantee but the aim of setting it up is to benefit the community it is in. What differentiates CICs from LLCs is that they must register and list the specific community interest they intend to provide, make sure there is a cap for dividends paid, and have their assets must be locked so that it is non-transferable.
- Charitable Incorporated Organisation (CIO) – this is the structure that registers charity organizations in the UK and they must be registered with both the Companies House and the Charity Commission. While the company may not be expected to pay tax, its assets and profits must be locked such that they are only used for charitable purposes.
- Industrial and Providence Society – this can be in form of cooperative societies or financial mutuals. The cooperative society can either be for the benefit of its members only or for the community; whichever they chose to be, it must be clearly stated when registering with the Companies$. The structures under this form must also submit their statements of accounts to the Financial Services Authority rather than the Companies House.
Why you should choose the right legal form for your business
Choosing the right legal form for your business is very important for the following reasons.
- If you choose to start small, say being a sole trader, you can easily scale up to becoming a private or public limited liability company.
- The right legal form will limit the amount of tax you have to pay and there are tax exemptions that could make your business more profitable.
- When you have a legal form, you will be able to register with the government so that you have access to grants and incentives from the government.
- Having a legal form for your business gives it a professional outlook that could help you gain ground with investors.
Understanding the legal forms of doing business is very important for you to make the right choice. There are times when companies do not need to be incorporated. It will also enable you to know if and when to commence a business because the incorporated forms require that the business is registered before you start transacting business.
What are the different legal forms in the UK?
1. The incorporated legal form:
This form consists of legal structures like limited liability companies, limited liability partnerships, charitable incorporated organizations, community benefit societies, etc. This form is legally seen as a separate entity from its owners and is therefore responsible for its own liabilities.
A team of experts will get you the answers you need to get started with your business.