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Which business structure is right for you?

Partnerships vs Private Limited Companies If you’re planning to start a new business, one...

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Which business structure is right for you?

20th October 2016

News : Commercial

Partnerships vs Private Limited Companies

If you’re planning to start a new business, one of the first things you will need to decide is how you would like to trade. There are three main business structures available in England and Wales:

  • Sole Trader;
  • Partnership; and
  • Company.

The focus of this article will be private limited companies and unlimited (or general) partnerships; it will briefly outline the key features of each of these business structures.

What is a partnership?

There are three main types of partnership;

  • unlimited (or general);
  • limited and
  • limited liability

The focus here will be on the features of an unlimited partnership. An unlimited partnership consists of two or more people carrying on a business with a view to making profit; the partners usually share profits, losses and management of the business (although not necessarily equally).

Unlimited partnerships are governed by the Partnerships Act 1890; the provisions of this act will apply by default if nothing is agreed to the contrary. It is, therefore, extremely important to have a comprehensive Partnership Agreement in place which allows your partnership to operate in the way that you and your partners intend rather than in accordance with 19th century legislation.

Registration

Unlike a private limited company, there is no need to register an unlimited partnership at Companies House and there are no filing requirements associated with this business structure. This lack of formality and regulation is considered to be a major advantage of the unlimited partnership structure.

Profitability

As a partner in an unlimited partnership, you do not receive a salary; rather you take a share of the profits of the business. The default position is that profits will be shared equally amongst all partners; this position will be ousted by any agreement to the contrary (i.e. by way of partnership agreement). Partners must pay tax as a self-employed individual meaning that it is necessary to submit a self-assessment tax return each year.

Liability

You may not want to think about the business failing before you have even started. However, it is important to be aware of your potential liability from the outset. The default position is that partnership losses are to be borne equally by all partners. Partners are jointly responsible for the contractual debts of the partnership; and jointly and severally liable for tortious obligations. Again, this default position can be altered by making an agreement to the contrary.

Management

Sharing the management of your business can be both a blessing and a curse. As the saying goes: “two heads are always better than one”; having multiple decision makers should spread the workload. However, it gives rise to the potential for dispute and decision-making may be slow if all partners are attempting to contribute. Again, a partnership agreement may be the answer. The agreement can deal with who will manage which parts of the business which should avoid the possibility of “too many chefs spoiling the broth”. In addition, the agreement can set out how disputes should be resolved, meaning that disputes are resolved fairly and efficiently.

 What is a private company limited by shares?

A registered company is, in law, a separate entity from its shareholders, officers and employees. It is essentially the legal framework within which the business operates. Being a company limited by shares simply means that the company has a share capital.

Registration

To start trading as a private company limited by shares, you will need to file form IN01 with the Registrar of Companies and to provide a memorandum of association and articles of association. The company’s articles of association are of paramount importance. The articles act as the company’s rulebook; they state how the company will operate and they divide powers between members and directors. The importance of a well drafted set of articles cannot be overstated.

Profitability

If the company makes a profit, the shareholders may receive a share of this in the form of a dividend. Shareholders are not automatically entitled to a return on their investment by way of a dividend; the company must have sufficient distributable profits and the directors must declare a dividend. Exactly when and how dividends are to be distributed should be set out the in company’s articles.

Liability

The company is responsible for all of the debts and obligations of the business; the company has unlimited liability. It is the shareholders who enjoy limited liability; this simply means that should the business be unable to meet its financial obligations, the shareholders stand to lose the amount they have paid for their shares only.

Management

The day-to-day running of the business is the responsibility of the directors. At the time of registration, you will need to appoint at least one company director. It may be appropriate to consider the use of a director’s service agreement. As previously stated, your articles will set out who has the authority to make which decisions in connection with the company’s operations. (N.B. the Companies Act 2006 specifies whether it will be the Board or General Meeting who must make decisions in certain circumstances).

Conclusion

When it comes to starting a new business, choosing the appropriate business structure is the most important step; it is vital that you are aware of all your options and are able to make an informed decision. Once you have decided upon an appropriate structure, it is imperative that you have appropriate documentation in place.

If you would like advice in connection with the appropriate business structure for you or assistance with putting the necessary documentation in place, please don’t hesitate to contact a member of our commercial team:

Sarah Jarett – Head of Commercial  01270 619675

Luke Pritchard – Solicitor 01270 619698

Eve Lakin – Solicitor 01270 619689

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