UK Startup Corporate Structure
As with anything, business has a structure that needs to be set up and followed. You’re an entrepreneur based in the UK and you want to know what corporate structure your startup can or should set up.
In this blog we’ll explore:
- What is a corporate structure
- Types of corporate structures in the UK
- What are the benefits of a corporate structure
- How to legally set up a corporate structure in the UK
What is a corporate structure
Well, a corporate structure refers to the way your business is organized to enable it to achieve its goals. Who makes the decisions, what decisions can be made by people in certain positions and so forth. A structure governs who holds what authority and decision making power.
A corporation is a form of organization that has an existence independent of its owners. Corporations have powers and liabilities separate and distinct from those of its owners.
Corporate structure refers to how a business is organized to accomplish its objectives. The corporate structure of a business is important because it determines the ownership, control, and authority of the organization.
Types of corporate structures in the UK
Starting the journey with your new start-up brings a lot of excitement, right? But also plenty of challenges. There will be many questions and things you need to find the answers for, one of which will most likely include, what are the different types of business structures?
The structure you choose will have significant implications on the amount of tax you pay, the degree of your personal liability (should the business fail), the amount of administrative work involved and even your ability to raise finance.
There are 4 main types of business structures in the UK and each has various tax and liability implications for owners and shareholders:
This is the simplest and easiest form of business to register. You are a self-employed sole trader if you start working for yourself and you must register this business with HMRC. As a Sole Trader, the business is run by you and you alone. It’s also important to note that you are not a separate entity from the business.
A Partnership involves two or more individuals that agree to share in the profits or losses of the business. You ultimately share the risks, costs, benefits and responsibilities of running the business. Partnerships are referred to as unincorporated entities in that the partners are self employed. You and your partner(s) are personally responsible for the losses or debts that the business undertakes. Each partner is also responsible or liable for the other partner’s negligence or misconduct. The profits or losses from a partnership will be shared between the partners. This will be in the agreed profit sharing ratio and each partner pays tax on their share of the profits. It’s important to establish this kind of corporate structure with people you trust to a certain extent.
Limited liability partnership
An LLP is similar to a partnership except that the partner’s liability is limited to the amount of money they invest in the business. The LLP must be registered at Companies House and with HMRC. Annual accounts also have to be prepared and filed. An LLP can be incorporated with 2 or more members and a member can be an individual or a company. Members’ responsibilities and share of the profits are set out in an LLP agreement and all members must submit a personal Self Assessment Tax Return every year, pay income tax on their share of the partnership’s profits and pay National Insurance to HMRC.
A limited company is a privately managed & held business, owned by its shareholders and run by its directors. The company is a separate legal entity with its own legal rights and obligations. This means the company is responsible for everything it does and its finances are separate to the personal affairs of its owner(s). Any profits generated are retained by the company, after it pays Corporation Tax. Only then can the profits be distributed to shareholders in the form of dividends. Limited companies can be limited either by shares or by guarantee. Limited Companies also have annual reporting and filing requirements with both the Companies House and HMRC.
What are the benefits of a corporate structure?
There are several advantages to becoming a corporation, including the limited personal liability, easy transfer of ownership, business continuity, better access to capital and, depending on the corporation structure, occasional tax benefits. The legal structure of your corporation and the benefits you receive from it will depend on the specific setup of your business.
These include but are not limited to the following:
- Flexible business expansion
- Well-defined governance agreements
- Limited liability and increased personal asset protection
Your corporate business structure enables easy additions of new shareholders, investors, and co-owners. Additional shares can be issued to new shareholders easily. A corporate structure is also flexible in how it moves, and ownership can be transferred, and the company sold, with minimal hassle.
Under a corporate business structure, a written shareholder agreement clearly outlines all governance rules, exit protocols, and dispute processes. This provides a strong support structure to make business decisions with confidence, and ensures all shareholders are on the same page.
How to legally set up a corporate structure in the UK
Setting up your corporate structure in the UK depends on the type of business you’re running or plan to run. The first step is obviously to register your business. Visit the official Gov.UK website for steps on how to do so. The UK has around six million private sector businesses, according to official government data, and this figure is growing. Since 2000, the number of businesses in the UK has increased by 2.4 million. [Source: Expatica]