Alternatives to a limited company

Setting up a company is now one of the most common methods (together with PAYE employment) for an individual (or group of individuals) to earn an income or commence or continue their career.

• in 2020 the UK had over 5.5 million small or medium-sized businesses of which almost 71% were companies and public corporations.
• approximately 75% of SME businesses in the UK are owner-managed, with no employees, and 95% of all SME businesses have 9 employees or less. SME businesses have risen by approximately 63% since 2000 and are quite clearly becoming one of the main components of the UK’s economy and central to its success.

Whilst a majority of this success is down to companies, there are alternatives to a company which have their own benefits and risks. We address the most common alternatives below.

Sole proprietor

This is the simplest form of an SME business where it is run without any legal structure. Whilst such a business can use any trading name (subject to other legal restrictions on intellectual property) the business profile is free of any legal requirement to register its existence or disclose its structure and financial position.

A sole proprietor, whilst having a legal duty to file tax returns with HM Customs & Revenue, does not otherwise have to disclose his/her assets to the public at large or in any way be transparent as to the business profitability and solvency.

• however, a sole proprietor business is not entirely free of regulation.
• the individual who runs it is still required to register for VAT if the business has a turnover in excess of the statutory threshold, the business owners are still required to file tax returns and ultimately the business owner is personally liable for any obligation that would otherwise be borne by business (if a limited company had instead been formed).

You do not have to pay corporation tax on your profits (as these are accounted for via your personal taxation), but you may still have to register and pay any obligations for PAYE or National Insurance due on employees’ salaries.

In the event the business suffers financially and cannot continue to trade, insolvency arises upon a creditor of the business petitioning for the individual owner’s bankruptcy.

Unincorporated partnership

A business Partnership is commonly a business set-up between two or more persons with a common objective of seeking profit. Such a partnership is usually formed under a partnership deed, although any common intention to form a partnership (even without any written agreement) can be defined as a partnership.

• following the growth of the incorporation of companies, a partnership has become less common in recent years.
• in addition, from 2000, limited liability partnerships have sought to replace traditional unincorporated partnerships (see below).

The advantage of an unincorporated, or “old style”, partnership is it can be relatively simple, and its financial information is also not published publicly, as with sole proprietorship businesses.

However, this simplicity can provide false comfort as tax liabilities remain and are personal, and often very complicated to deal with where the legal structure of the business is not written down or may potentially be uncertain (from third parties’ points of view).

In addition, as the partnership is usually a joint enterprise, individual partners rely on the other members to pull their weight and cannot rely on their own individual success within the business. If a partnership faces financial distress, including insolvency, all partners will individually be faced with the consequences.

Limited LiabilityPpartnerships

A Limited Liability Partnership, or LLP, was first introduced in the UK under the Limited Liability Partnerships Act 2000. An LLP acts to close the gap between the traditional role of shareholders (as owners of the business but with little management powers) and directors (who do not have rights to share in the Company’s profits). In an LLP, as with an unincorporated partnership, the partners both own and manage at the same time with the necessary rewards more easily accounted for.

• the benefits of an LLP are that the partners retain their capital interest, which remains an obligation of the LLP, as a distinct interest separate from other partners’ interests (which may be different, dependent on the provisions of the partnership deed). Accordingly, an LLP has the effect of persuading individual partners’ success, as opposed to the wider purpose and more diluted interest of an owner-manager in a limited company;
• an LLP does however bear similar responsibilities in terms of the requirements to file accounts and structural documents at Companies House.
• however, in exchange for this transparency, when an LLP is insolvent, the partners retain the ability to walk away (as with a company).

There are a number of complex issues arising with LLPs, which you should take accounting and legal advice on, and they may not be appropriate for all new businesses. For example, the way the business is managed in an LLP can be less formal (as with an unincorporated partnership) and therefore there may be other risks associated to the management by partners.

---

If you require more assistance with understanding the above information or in respect of the formation, management and running of your business, then at Francis Wilks & Jones you will always speak to someone at a senior level who will respond to any query you have very quickly. Please call any member of our team for your consultation now. Alternatively email us with your enquiry and we will call you back at a time convenient to you.