What Are the Different Structures of a Business? (With Tips)
There are many different ways to structure a business. The option you choose depends on the overall framework of your company, so it's important to consider the various legal distinctions between the different business structures, including tax classifications, before making a final decision. Other considerations, such as where you intend to operate, can influence the type of structure you use. In this article, we outline the various structures that you can choose from and provide tips for choosing the right structure of business for your company.
Related: 4 Types of Business To Start
What to consider when selecting a business structure
When choosing the business structure for your company, it's important to consider the following factors to find the best fit for your situation:
Eligibility criteria**:** Some structures require companies to meet certain criteria before you can select them. For example, certain structures require businesses to be non-profit.
Fixed costs**:** All of the structure options have fixed fees attached to them, but the overall cost can vary depending on the type you choose.
Legal requirements**:** Some structures include strict legal and reporting systems. It's important to know in advance if your business can meet these requirements.
Tax implications**:** All companies account for taxes, but some structures offer better tax benefits than others.
Damage liability: A company structure can outline the form of injury or property damage liability that your company may be accountable for, so ensure you choose the most suitable option for your liability needs.
Flexible structure: Sometimes, a business might look to change its structure, so if you feel this may be likely for your company, make sure you select an option that allows for it.
Different types of business structure
Once you have taken the time to consider how your business is going to function, think about the various types of company structures you can use. Here are the different types of structures you can select from based on your needs:
1. Limited liability company (LLC)
A limited liability company (LLC) is an excellent option for smaller businesses, as it can protect owners from personal liability in the event of business losses. If you're looking to establish your business as an LLC, you can create a written agreement that lays out the framework of your company. In the agreement, it's important to include any information about management, the assignment of interests and paperwork that establishes how you intend to oversee profits and losses.
LLCs also have some limitations to consider. For example, they cannot provide any banking or insurance services. It's crucial to thoroughly assess your business practices before choosing an LLC as your structure, as it's not suitable for all companies.
2. Sole trader
Becoming a sole trader is a common structure for businesses that is simple to set up and establish. Either an individual or couple becomes personally responsible for any debts the business incurs. Being a sole trader involves fewer legal responsibilities and tax regulations, which makes it a desirable option for smaller businesses. Establishing a business as a sole trader could make it easier for you to manage a business alongside your personal finances. Individuals that choose to become sole traders tend to be smaller businesses, retail outlets and artisans.
A corporation is a structure that helps to protect an individual's personal assets and separates them from business ventures. A corporation is legally viewed in a similar way to a person, which allows for a legal distinction between a corporation and its owner. There are other inherent positive aspects, such as tax benefits and financial incentives specific to corporations.
The downside to using the structure of a corporation is the lack of autonomy and control you'd have over the company. Corporations use corporate officers to guide decisions within the company, which takes much of the control away from the business owner. A corporation is a good option if you have a medium or high-risk business as it protects your assets. It's also a good option if you intend for your business to become a publicly traded company in the future.
4. Community interest company
A community interest company is a type of structure that focuses on benefiting a specific community over private shareholders. The purpose of this type of business is to drive revenue towards an overall mission, rather than simply making profits. A community interest company is a useful structure option if you're looking to perform philanthropic deeds through your company.
It's important to note that community interest companies do not receive any tax benefits. This means this structure is subject to corporation tax and value-added tax. The main positive aspect of this structure in terms of taxes is that you could deduct any donations when calculating profits for corporation tax.
5. Business partnership
A business partnership is a type of structure that incorporates two people (usually not married or in a relationship) in a company together. The setup of a business partnership dictates that all profits, losses, investments and business decisions get split between the two individuals. This also includes shared labour costs or services rendered on behalf of the company. A business partnership can work well when two like-minded individuals share an idea that could generate revenue. This is an option that can help spread the risk of a new business across multiple people rather than a single business owner.
6. Limited partnership
A limited partnership includes a number of general partners and limited partners across the business. A limited partner doesn't participate in the day-to-day activities of the business, but they make financial contributions and investments. They're also eligible for a share in any profits made by the business. General partners are responsible for the overall operation of the business, sharing in both profits and losses. A limited partnership can work well if you're looking to pool a group of individuals together for investment purposes. Real estate and the construction industry use limited partnerships regularly to separate daily tasks from investments.
7. Limited liability partnership
A limited liability partnership is a structure that includes partners who are not accountable for a company's losses that were the result of another partner. Otherwise, it's a very similar setup to a business partnership. This is a useful structure for businesses that have partners who work independently while contributing to the overall business. Manufacturing companies use limited liability partnerships frequently.
A trust is a professional relationship that can act as a company structure. It incorporates an individual, known as the trustee, responsible for holding funding or property for another individual. The owner of these assets is the beneficiary. A trust is normally put in place when assets are personal rather than owned by the company. For example, a family looking to start a business can use a trust. They're also commonly used for charitable and non-profit business operations.
Tips for choosing the best structure for your company
Before deciding on the most suitable structure option for your needs, you may wish to consider various factors. For example, it's important to identify the most valuable aspects of your business and its overall goals. Here are some tips for selecting the best structure for your business
Do your research**:** Take the time to consider all of your potential options that might suit your needs. Think about the future of your business and what that may entail.
Speak with a professional**:** There are a lot of great resources available on the official UK Government website about the various structure options. If you're still unsure about what best suits your needs, you can speak with a qualified financial professional or legal advisor.
Use your existing social network**:** If you know of any business owners or individuals who are using a structure for their business that you're considering, reach out to them. You can use them as a resource to learn about the specifics of that particular structure to find out if it's the best choice for you.
Please note that none of the companies mentioned in this article are affiliated with Indeed.
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