3.1 Business legal structures
Understanding the different structures a business can have is the first step, the next step is to choose an appropriate structure for a specific business scenario.
Here are some of the advantages and disadvantages of the main different structures for you to consider:
| Structure | For | Against |
| Sole trader | Low cost, easy to set up Full control retained Very little financial reporting | Full liability for debt Pay more in tax Lacks credibility in market |
| Partnership | As for sole trader, but with more heads More potential to raise finance | As for sole trader, affecting all partners Can be messy to wind up |
| Limited company | Less personal financial exposure Favourable tax regime Ability to work for corporate clients | Administrative and regulatory demands heavier Annual accounts and financial reports must be placed in public domain |
| Limited liability partnership (LLP) | Flexibility: can be incorporated in members’ agreement Advantages of limited company and partnership combined | Profit taxed as income Partners must disclose income LLP must start to trade within a year of registration – or be struck off |
| A charitable company | Reduced business rates Allows paid staff to be employed Delivering charitable services under contractual agreements Entering into commercial contracts Owning freehold or leasehold land or other property | Can’t distribute its surpluses to its members or shareholders A charitable company is usually limited by guarantee, not shares Can only apply its assets to carry out its charitable purposes Must operate in a way which is in the best interests of the charity |
Footnotes
(Startups, 2016)Activity 5
What is the preferred legal form for these different types of business?
Consider the different forms of business venture or associations between people listed below.
What do you think would be the ideal business form for each?
Make some notes and give reasons for your choices.
| Form of business venture | Preferred legal form (with reasons) |
| A major high street retailer with thousands of shops | |
| A choir of 30 – 40 people | |
| A professional partnership of 25 solicitors | |
| A local golf club (with, say, 200 members) | |
| A major golf club (such as St Andrews or Wentworth, with many thousands of members and significant business activities) | |
| A small pharmaceutical company manufacturing specialist medicines | |
| A small plumbing business, ‘Bloggs and Daughter’, with a father and daughter working together to provide plumbing services to the local community | |
| A professional chef starting a new restaurant to support the development of young, unemployed people in the catering industry |
Comment
On the understanding that there are no strictly ‘right’ answers, you may have come up with something similar to the following:
| Form of business venture | Preferred legal form (with reasons) |
| A major high street retailer with thousands of shops | Public limited company (plc) (and possibly a group of companies), with shares registered on a stock exchange and available to the public and with the liability of the shareholders limited to capital already paid in. |
| A choir of 30 – 40 people | An unincorporated association, not intending to make a profit but with a bank account to order and pay for music, pay expenses and settle bills. |
| A professional partnership of 25 solicitors | A limited liability partnership (LLP), providing the organisational benefits of trading as partners but with the liability of partners limited to an agreed sum, and with partners not being financially responsible for the misconduct or negligence of a colleague. |
| A local golf club (with, say, 200 members) | This could certainly be run as an unincorporated association, but in practice a club of such size (involving business activities such as equipment hire and sales, and bar/restaurant facilities) would probably seek the protection of limited liability (Ltd) for its members. |
| A major golf club (such as St Andrews or Wentworth, with many thousands of members and significant business activities) | It seems very likely that the proprietors of a golf club of this size and stature would seek the protection of limited liability (Ltd or plc) status in some form. It would be unsurprising to find that a venture of such a scale would involve a group of companies. |
| A small pharmaceutical company manufacturing specialist medicines | Pharmaceutical manufacturing is a specialised business that involves risk to the public in the event of a medicine having an undesired effect. The protection of private limited liability (Ltd) status would undoubtedly be sought by the owners. |
| A small plumbing business, ‘Bloggs and Daughter’, with a father and daughter working together to provide plumbing services to the local community | A ‘general partnership’ would be a common form of business classification for a family business like this, although a private limited liability company would not be uncommon (e.g. ‘Bloggs and Daughter Ltd’). |
| A professional chef starting a new restaurant to support the development of young, unemployed people in the catering industry | Jamie Oliver did this with his Fifteen Restaurant. This is a charitable company, so a limited company that is a registered charity. This allows all the operational freedom of a limited company but with the tax arrangements of a charity. |
While considering the preferred legal form for each of these enterprises you may have realised that, in theory at least, most of the available forms of classification can be applied to any business. That is not to say that it would be appropriate or sensible to run a major high street retailer as (for example) a general partnership. The choice will generally be made on the basis of financial interests (the balance of risk and return for the members/owners/ shareholders, and perhaps on taxation considerations) and on the appropriateness of the administrative burden for a venture of a certain scale or with a particular profile of business risk. Some businesses, such as a large firm of solicitors, will be required by their regulatory bodies to run their affairs in a certain way, so some business forms will not be options for them.
Useful resources:
OU Careers Advisory Service – Self-employment [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)]
3 Business structures