What are business legal structures? (With examples)

By Indeed Editorial Team

Updated 16 January 2023

Published 3 January 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Founding a company can offer the opportunity to make important decisions about how to run it, such as which business legal structure to use. Since there are different structures, it can be helpful to consider which of the options are most suitable for your company so you can generate the most success. If you're just starting out in business, it knowing about business legal structures can also help you identify ways to start your business in the most profitable position. In this article, we define what business legal structures are and address common questions on how they can affect your company.

What are business legal structures?

Business legal structures are different categories that define how businesses register with the government. A company's business legal structure determines how it pays taxes and the degree of your liability as an individual if the business encounters challenges. It can also influence what kinds of paperwork you use to ensure your business adheres to legal regulations and how frequently you might fill out and submit new forms. The type of structure you choose can also affect which National Insurance fees you pay and how the government might use the data.

What are the different types of business legal structures?

There are three key types of business legal structures in the UK, with some alternative options available for special types of businesses. Here are the most common options available right now:

Sole trader

A sole trader is a 'self-employed' person who registers with HM Revenue & Customs (HMRC) as a company. Sole traders run their own businesses and keep the profits they earn after tax, but they also remain personally liable for all business debts. They pay both income tax and National Insurance according to thresholds for turnover. Sole traders submit this information online or in-person using a Self-Assessment Form.

Related: How to brand yourself in 10 steps

Limited company (Ltd.)

Limited liability companies are private and have owners that are legally responsible for debts up to the level of capital they invest. Limited companies have shareholders who have liability to creditors limited only to the amount of money they originally invest in shares. In limited companies, shareholders' personal assets are protected in the case of unforeseen circumstances that cause the company to lose money, but they can sometimes lose their original buy-in. These companies typically have at least one director and one guarantor, who can be the same individual, and pay an application fee to incorporate.

Partnership

A partnership is a structure of two or more individuals sharing both the management, profits and taxes of a business. Each partner pays tax on their share in the partnership and these partners can be either individuals or another company, which counts as a legal person. The 'nominated partner' is the member of the partnership that manages records and tax returns. A partnership agreement document outlines the details regarding ownership, liabilities, the split of profits and the agreement if one partner leaves the partnership. Each partner is self-employed and submits their own tax return.

Can an accountant incorporate my business for me?

You can incorporate your company by yourself for a small fee, but employing an accountant to do this can make the process easier. The process can sometimes involve high volumes of forms and documents, which an accountant's specialised knowledge can help them complete accurately. Receiving financial advice from an accountant before starting can further help you to establish which of the structures can best align with your long-term business goals, such as establishing brand awareness and maximising revenue.

It can also be helpful to consider using an accountant to incorporate your business if you're new to financial paperwork so you can learn about how to complete it properly from a professional.

Related: Account manager skills: definition and examples

Special business legal structures

Here are a few examples of special types of business legal structures:

Limited Legal Partnership (LLP)

A Limited Legal Partnership can share traits with both a partnership and a limited company. Nominated partners still deal with records and accounts, but an LLP further limits the liabilities of some or all members to their investment in the business and any guarantees they give when raising loans. Each member registers with HMRC as self-employed and pays taxes according to income. LLP's further register at Companies House and the member's agreement states the distribution of profit amongst members.

Private unlimited company

A private unlimited company is a privately run company like a limited company, but there's no limit on the liability of its shareholders and investors. In the event of the company's liquidation, shareholders are liable for meeting all costs and debts incurred by the company. There are few unlimited companies in existence, but they generally form since they can maintain greater privacy over their financial affairs from the public or competitors. They can also happen when a business is complex and a limited company approach does not suit their model well.

Public limited company (PLC)

A public limited company is a company that follows the same rules as limited companies but keeps its finances separate from the personal finances of its members and shareholders. PLCs also allow the general public to buy shares, which can lead to increased brand awareness and more revenue from stocks.

Directors manage these companies separately from shareholders and often work towards other business goals than only meeting the goals of shareholders. Businesses sometimes opt for this approach since the public sale of shares can provide a great increase in raised capital and because of the added exposure and brand recognition that being a PLC can bring.

Related: 9 essential director skills

How do I determine which business structure is right for my business?

The business structure that suits your company best can often depend on how much capital you invest in the company and how many people you want as shareholders. Businesses that are run in-house by a core group of individuals, such as family or friends, may benefit from a partnership approach. Alternatively, if you want to maintain control and liability over the company, you might prefer to operate as a sole trader and pay taxes according to the different thresholds. Consider booking professional consultation about your options or ringing a government helpline for advice.

Related: 8 essential business manager skills

Advantages of the main company structures

There are many advantages to the main types of company structures that can guide your decision about how to structure your business agreements. Here are some of these advantages:

  • Sole trader. The main advantages of being a sole trader are that you maintain full control of your affairs and that there's usually a limited amount of paperwork to do beyond your self-assessment. Accountants can also charge lower rates for sole traders since there's less paperwork required overall, so professional consultation is cheaper.

  • Limited Company. With a limited company, finances can be easier to raise, it can be simpler to sell the company and creditors cannot seize personal assets to cover financial issues, only the assets that the company itself holds.

  • Partnership. These can be a straightforward way of starting a business with a small group of individuals since all partners are self-employed, so paperwork and government involvement is limited. This also allows you to set the terms of agreements and the distribution of profit and responsibility flexibly and independently.

Related: Everything you want to know about being a sole trader

Disadvantages of the main company structures

There can also be disadvantages to each type of structure that may cause another type of structure or a specialist approach to be more suitable for your business. Here are some of these disadvantages:

  • Sole trader. The main disadvantage of sole trading is that you assume full personal liability for the debts of your business and any legal action raised against the business. It can also be more difficult to sell your business, especially if you're trading under your own name rather than a company name.

  • Limited company. They're subject to restrictions and paperwork, which can be difficult to complete for new business people, and they can be expensive to maintain if your company lacks capital. There are also some requirements to set up a limited company and restrictions on your trading name.

  • Partnership. The primary disadvantage to a partnership is the lack of liability limitations since creditors can seize unlimited assets from any partner. The partnership can also dissolve if a partner leaves, and then all liability passes to the other partners.

Related:

  • What Are the Different Business Structure Types? (With Tips)

  • Hierarchical Structures (with examples)

  • How to start a nonprofit organisation in the UK (with types)

  • What are the pros and cons of divisional structures?

  • What is organisation structure? (Types and benefits)


Explore more articles