In this post I introduce the different company structures in the UK. Read on to discover more.
In the UK the following company types exist:
- Sole traders
- LLPs (Limited Liability Partnerships)
- Private Limited Companies
- Public Limited Companies
Each business type has different legal consequences. I will briefly deal with each in turn.
Anyone who starts working for themselves on a self-employed basis normally automatically becomes a sole trader. No legal formalities are necessary to set up as a sole trader.
Sole traders are responsible for reporting their own income.
There is no public disclosure of financial records.
Sole traders are in complete control as to how the business is run. Essentially they control their own destiny.
One disadvantage of being a sole trader is they have unlimited personal liability. Essentially all their assets can be liable to pay for a claim made against them. Essentially no distinction is made between their business assets and their personal assets. All their assets are therefore liable to pay for debts regardless of their status.
Some sole traders may be able to take out public liability insurance. This may help them meet the cost of some claims (e.g. a professional negligence claim). This would not however cover general trading debts, etc. Sole traders will always be personally liable for these debts.
If a sole trader cannot pay their debts, they could become bankrupt. For this reason, raising finance from banks is often a difficulty for sole traders.
A partnership exists where two or more people start working together with a view to making a profit.
No legal formalities are necessary to set up a partnership.
Partners are taxed as individuals.
There is no public disclosure of partnership financial records.
As indicated, no legal formalities are necessary to create a partnership. However, a partnership agreement is always a good idea. A formal agreement can help to avoid or reduce disputes at a later date.
Ideally the partners should have a finalised partnership agreement before the partnership begins. The agreement sets out (amongst other things):
- Who has what responsibilities, powers, etc.;
- How decisions are made in the the partnership; and
- What shares in profits/losses each partner has
A partnership agreement can also set out important internal procedures for the running of the partnership. It can also set out procedure for partners leaving the partnership or new members joining. This is important, because, for example if a partner ‘retires’ from a partnership the partnership automatically ends. A partnership agreement could provide that the partnership continues notwithstanding a partner leaving.
In the absence of express agreement saying otherwise, each partner has an equal share in profits (and losses). If one partner has contributed more assets or capital into the partnership, for example, this may be unfair. The partnership agreement can vary the default position of equal shares in profits (and losses).
Decision making in partnerships
By default, decisions in the partnership are made by agreement of the majority of partners. This could possibly be problematic in practice. One partner might, for example, not wish to involved in the management of the partnership. The partnership agreement could say what type of decisions need the agreement of a majority and which decisions need all partners to agree upon. It could also provide for what happens if a partner is, for example, hospitalised.
In addition, if ‘the decision by majority’ rule is not varied (typically) in a partnership agreement and there is an even number of partners this create problems. In this situation there is likely to be a deadlock at some point when the partners cannot agree upon an issue. The partnership agreement could set out what happens in this situation. This could be, for example, one partner’s decision having the final say. Agreeing this in advance however may be problematic and could cause friction and frustration at a later date.
Partners should get legal advice to ensure the agreement accurately records their wishes. The advisor would also advise them on the legal consequences of the agreement. They would also seek to cover common problematic situations in the partnership agreement.
Personal liability of Partners
Partners have unlimited personal liability for any debts of the partnership. This means there is no distinction between their business assets and personal assets. Consequently all their assets are liable to settle any partnership debts.
LLPs (Limited Liability Partnerships)
Limited liability partnerships are similar to partnerships. The main points concerning LLPs are:
- LLPs must be registered formally at Companies House
- People who run a LLP are ‘members’ rather than ‘partners’
- Members of a LLP have limited liability as to the liabilities of the LLP. This means that their personal assets are not liable to settle general debts of the LLP.
- However, a member of the LLP could have unlimited liablility for their own personal conduct. This is usually when a claim is made against them for professional negligence. In this situation their own personal assets may be liable to pay for any claim.
- Members may be able to take out professional negligence insurance. This may help them to meet the cost of a future professional negligence claim.
- LLPs must send financial records to Companies House, which the public can see.
Private Limited Companies
A limited company does not exist in law until registered at Companies House. Registration is possible by post or online.
Some of the main parts of setting up a private limited company include (amongst others):
- appointing a director (or directors or director(s) and secretary);
- allotting shares;
- submitting the company articles; and
- confirmation of who is responsible for keeping Companies House records up to date, etc.
The articles are an important part of the company constitution. Amongst other things, the articles set out:
- internal procedures that must be followed by directors; and
- voting procedures, etc.
There are standard articles that can be used. However, each company should amend these to meet the needs of that company. Consequently, legal advice is essential to ensure the articles are suitable for the proposed company.
The public can read the annual accounts of private limited companies.
Decision making in limited companies
Directors’ powers are usually set out in the company articles, but are subject to legislation. Directors usually can make normal everyday decisions on the running of the business. However more important decisions relating to the company usually need the shareholder’s approval.
Liability of Shareholders & Directors
Normally shareholders in a private limited company have limited liability. What this means is they could lose their investment, for example, if the company becomes insolvent. They would however normally not be liable to pay anything further towards the companys’ debts.
The concept of limited liability, strictly speaking, only applies to shareholders and not directors. What this means for someone who is both a director and a shareholder is:
- In the absense of wrongdoing the person will usually have limited liability as a shareholder, so may lose their shareholding investment.
- However, as a director they may have to contribute towards the companys’ losses.
- Directors normally do not have automatic personal liability. However, they may be personally liable for personal misconduct. I do not discuss this further here, but would happily discuss it during law tuition.
Public Limited Companies
Public limited companies are similar to private limited companies. However they have two main differences from private limited companies. The two main differences are:
- Public limited companies must have a minimum of £50,000 allotted share capital; and
- A company secretary is a requirement for public limited companies.
One advantage public limited companies have over private limited companies is they can offer shares to the general public. Therefore, their ability to raise finance is greater, because they can advertise to the general public.
Shareholders in a public limited companies again usually have limited liability (i.e. they may lose their investment to settle debts).
Directors again could have liability to the company for misconduct, but I do not discuss this further here.
This aim of this post to give people an introduction into the different types of UK company. It is just for information purposes.
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