5 What kind of business structures are there?
One of the decisions you will be faced with early on in the setting up of your business is what legal structure it will take. It is important to distinguish between the legal form – how the law regards the enterprise – and organisational type, which is how you regard it and present it to the world. You can have several organisational types, but you will have only one legal form.
There are several legal options available for your business structure. Here are some brief definitions:
- Sole trader – the simplest way to operate. However, there are implications for how you raise finance and your personal liability for debts and tax. As a sole trader you are not separate from the operation.
- Partnerships – where two or more people co-own a business and share the income from it. As with sole traders, in the law, the business is not seen as separate from its operators.
- Limited liability partnerships – require at least one general partner and one limited partner – but you cannot be both. Limited partners contribute to the funding to start the company and are liable for debts up to the amount contributed. A limited partner cannot manage the business. General partners manage the business and are liable for any debts the business cannot pay.
- Limited company – the business is separate from the operators. Its finances are separate from the owner’s personal finances. Companies can retain profits after paying corporation tax. Companies need directors and shares, memorandum and articles of association and, in the UK, need to be registered with Companies House.
- Franchise – a business in which the owner or franchisor gives a third party (franchisee) the right to use their business name, logo and business model. McDonalds and Subway are well known examples of franchises on the high street. This is one way to start a business which avoids much of the activity required for a new business. It is also a way to scale your own business idea.
- Social businesses – there are common organisational types used by social businesses:
- Social enterprise – a business with primarily social objectives. Profit is mostly reinvested in the business or in the community, rather than maximising profit for shareholders and owners.
- Community enterprise – generally taken to be a social enterprise owned and run by a geographical community or a community of interest.
- Co-operative – an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically controlled enterprise (International Co-operative Alliance definition). There are many types of co-operative:
– worker co-operative – co-operative owned and run by its workers
– housing co-operative – co-operative owned and run by its tenants
– consumer co-operative – co-operative owned and run by its customers
– co-operative consortium – co-operative owned and run by other businesses which use the services of the co-operative
– multi-stakeholder co-operative – a mixture of any or all of the above.
- Community land trust – an organisation created to hold land as an asset for community use.
- Credit union – a non-profit financial institution that is owned and operated entirely by its members.
- Development trust – a community-based enterprise that secures and manages community assets.
- Social firm – a business committed to creating employment and training opportunities for people who are furthest from the labour market.
Any one of these business types can also be an ethical business, but whereas a social enterprise is established to benefit people and the planet as its primary purpose, an ethical business is one that seeks to minimise the harm done by its business to people and the planet.
Deciding what structure your business should take requires thinking about how you will finance it and what size of business you anticipate it will become. Bear in mind that an individual can trade for a social purpose as well as being a sole trader, and call themselves a social business. Indeed, there is very little legislation or regulation of the use of organisational types in business branding or marketing.
Refer back to your goals and ambitions. The structure will also have implications for who has control of the business, and whether audited accounts and named directors are required.