Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
Choosing the correct business structure for your business is important for a variety of strategic, financial, management, administrative and operational reasons. In this article, we summarise the primary alternative business structures available for businesses in the UK and identify key features of each business structure. In subsequent articles we will examine a variety of issues in relation to the commencement, administration, management and termination of the primary alternative business structures, which start ups should consider during the planning stage and prior to launch and existing businesses should keep under review.
If you would like more information about starting a business in the UK or would like to discuss a potential or existing business in the UK, please contact us by telephone on +44 (0)20 3126 4520 or +45 38 88 16 00 or by email at enquiries@orrlitchfield.com
There are several different trading vehicles or business formats that can be used for carrying on business in the UK. The most commonly occurring include sole trader, general partnerships, limited partnerships, limited liability partnerships and companies.
According to Companies House statistics, 646,703 new companies were formed in 2016, 622,713 in 2017 and 334,438 in the first 2 quarters of 2018. At the end of the second quarter of 2018, there were 4,075,891 companies registered as being in existence. These figures include public and private companies and limited liability partnerships only. They do not include the large number of sole traders and partnerships, which start businesses or the majority of the new agency, distribution or other similar contractual arrangements, which come into being.
As at the end of the second quarter of 2018, there were 6,702 public companies registered as being in existence and 53,502 LLP’s. The vast majority of the remaining 4,015,687 incorporated entities out of the 4,075,891 companies registered as being in existence are private companies limited by shares as there are very few private unlimited companies. Since the beginning of 2011, the number of public companies has decreased by nearly one-third from 9,853 to 6,702 at the end of the second quarter of 2018, and the number of LLP’s has changed from 44,292 at the beginning of 2011, to a peak of 62,553 at the beginning of the third quarter of 2016, to 53,502 at the end of the second quarter of 2018. Regulatory changes, amongst other matters, have made public companies and LLP’s gradually less attractive. It seems likely that the comparative decline in their numbers will continue.
A sole trader runs a business alone, makes all decisions affecting the business and owns all the assets of the business personally. Small businesses often operate as sole traders because of the lack of legal formality and the low administration costs involved in setting up and running the business.
The key features of a business operating as a sole trader include:
No separate legal personality. There is no legal separation between the business and the affairs of a sole trader. A business operating as a sole trader cannot own assets in its own right, or grant security over them.
Unlimited liability of participators. A sole trader is personally liable, without limit, for all the debts and other liabilities of the business.
Number of participators. There can only be one owner of a business that is operated as a sole trader.
No separation between management and ownership interest. There is no separation between the management and ownership of a sole trader business. The sole trader owns all the assets of the business personally and has full control over running the business. The sole trader makes all the decisions affecting the business.
Minimal formation formalities and filing requirements. There are no formation formalities or filing requirements for setting up a sole trader business.
Constitutional documents. There is no need for a business operating as a sole trader to adopt constitutional documents.
Ongoing administration and filing requirements. A sole trader business is not required to file accounts or other documents with Companies House.
A general partnership is defined as the relation which exists between persons carrying on a business in common with a view to profit (s.1, Partnership Act 1890).
General partnerships are governed by the Partnership Act 1890 (PA 1890). However, it is usual practice for the partners to enter into an agreement, which governs their relationship as partners and which supplements or displaces particular provisions that would otherwise apply under the PA 1890. Such an agreement can be express or implied, written or unwritten. It is good practice to make sure that any partnership agreement is properly prepared and in writing.
The key features of a business operating as a general partnership include:
No legal personality. A general partnership does not have a legal personality separate from its partners. A general partnership cannot own assets in its own right, nor can it grant security over them.
Unlimited liability of participators. Partners are jointly liable for the debts and obligations of the partnership business (s.9 PA 1890). Partners are also jointly and severally liable for the wrongful acts or omissions of their fellow partners in the ordinary course of the partnership business, or with the authority of the other partners (s.10 PA 1890).
Number of participators. There must to be at least two participators in the business for a partnership to exist. There is no statutory upper limit on the number of partners in a general partnership. A partner in a partnership can be a company as well as an individual.
No separation between management and ownership. Subject to any agreement between the partners to the contrary, the default position is that every partner has a right to participate in the management of a general partnership (s.24(5) PA 1890), and to participate equally in the partnership assets and profits.
Minimal formation formalities and filing requirements. No legal formalities are required to set up a partnership. It is not necessary to register a general partnership with Companies House. Partners will, however, usually regulate their affairs by entering into a formal partnership agreement.
Constitutional documents. There is no need for a business operating as a general partnership to adopt constitutional documents. The partners are not required to enter into a formal agreement to regulate the conduct of the business and their relationship as partners, although in practice most partnerships will do so.
Ongoing administration and filing requirements. A general partnership is not required to file accounts or other documents with Companies House.
A limited partnership (LP) must be registered under the Limited Partnership Act 1907 (LPA 1907). LPs are governed by the LPA 1907, the PA 1890 and the rules of equity and common law applicable to general partnerships, unless those provisions are specifically overridden by the LPA 1907.
LPs are broadly similar to general partnerships: they must be formed between two or more persons and carry on a business in common with a view of profit (section 1, PA 1890; section 7, LPA 1907). However, unlike a general partnership, they have two different categories of partner:
General partners. An LP must have at least one general partner who has responsibility for managing the LP's business and unlimited liability for the debts and obligations of the partnership business.
Limited partners. An LP must have at least one limited partner that does not take an active role in the LP's operation. Limited partners have limited liability up to the amount of capital that they have contributed to the LP, provided they do not participate in the management of the partnership business.
The key features of a business operating as an LP (that is not a Private fund limited partnership) include:
No separate legal personality. An LP registered in England and Wales does not have a legal personality separate from its partners. This means that it cannot own assets in its own right, nor can it grant security over them. The position is different in Scotland, as Scottish LPs do have a separate legal personality.
Liability of participators. The general partners have unlimited liability for the LP's debts and obligations (s.4(2) LPA 1907). The other partner(s) can be limited partners, meaning that their liability is limited to their agreed contribution to the LP.
Number of participators. There is no statutory upper limit on the number of partners in an LP, but there must be at least one general partner and one limited partner. A partner in an LP can be a company as well as an individual.
Separation between management and ownership. Management of an LP’s business and assets is undertaken by its general partner(s) exclusively. Limited partners that take part in the management of the LP's business will become liable for the debts incurred by the LP in the period during which they were so involved (s.6(1), LPA 1907).
Formation and filing requirements. An LP in England or Wales must register with Companies House using Form LP5 (s.5 LPA 1907). This form requires, among other things, disclosure of the identity of the LP's general and limited partners and the amount and type of the capital contribution of each limited partner (s.8A LPA 1907).
Constitutional documents. There is no need for an LP to adopt constitutional documents. The partners are not required to enter into a formal agreement to regulate the conduct of the business and their relationship as partners, although in practice most LPs will do so.
Ongoing administration and filing requirements. An LP is not required to file annual accounts or any form of annual return or confirmation statement with Companies House (the position differs slightly for Scottish LPs). It must, however, notify Companies House of certain changes to the LP or its partners.
A limited liability partnership (LLP) is a hybrid form of business entity that combines many of the benefits of a limited company with the organisational flexibility of a general partnership. LLPs are governed by the Limited Liability Partnerships Act 2000 (LLPA 2000), the Limited Liability Partnerships Regulations 2001 (LLPA 2001) and related legislation.
The key features of an LLP include:
Separate legal personality. An LLP is a body corporate with a legal personality separate from that of its owners (known as members) (s.1(2) LLPA 2000). An LLP can hold its own assets and grant charges over them. It can enter into contracts in its own right, and can sue and be sued in relation to those contracts.
Limited liability of participators. An LLP is liable for its own debts. The business liabilities and debts are the responsibility of the LLP, and not its individual members. The members of the LLP have financial exposure only to the extent of their capital investment (if any) in the LLP.
Number of participators. There is no statutory upper limit on the number of members in an LLP, but there should be a minimum of two members, at least two of which must be designated members. However, the LLP will not cease to exist if the number of members falls below two. Companies can be members of an LLP.
No separation between management and ownership. The default position is that there is no separation between the ownership and management of an LLP, as every member has a right to participate in its management (r.7(3) LLPR 2001).
Capital. An LLP has no share capital. There are no capital maintenance requirements and, unless otherwise agreed between the members, there is no obligation for members to contribute capital to the LLP.
Formation and filing requirements. A specified statutory procedure must be followed to incorporate an LLP, which includes registering certain documents (Form LL IN01) with Companies House. A fee is payable to Companies House on incorporation of an LLP.
Constitutional documents. There is no need for an LLP to adopt constitutional documents. The members are not required to enter into a formal agreement to regulate the conduct of the business of the LLP or their relationship as members, although in practice most members will do so.
Ongoing administration and filing requirements. LLPs are subject to ongoing filing and disclosure obligations which are broadly the same as those applicable to companies under the Companies Act 2006 (CA 2006) CA 2006. Such obligations include the requirement to file an annual confirmation statement and annual accounts with Companies House, and to notify any changes in its registered particulars (including any changes to its membership). A fee is payable in relation to some of these ongoing filing obligations.
A company is a trading vehicle existing in its own right; that is, it is a separate legal entity from the people who own and manage it.
The CA 2006 is the main source of law which regulates companies incorporated and registered in England, Wales, Scotland and Northern Ireland. The CA 2006 provides for the incorporation of three main types of company:
1. Companies limited by shares.
2. Companies limited by guarantee.
3. Unlimited companies.
The most common form of company used in practice is a company limited by shares. A company limited by shares can either be a private company or a public company.
The key features of all companies limited by shares (whether private or public) include:
Separate legal personality. A company limited by shares is a body corporate and has a separate legal personality from that of its owners (known as shareholders). A company holds its own assets and can grant charges over them. A company enters into contracts in its own right, and can sue and be sued on those contracts.
Limited liability of participators. A company limited by shares is responsible for its own debts and liabilities. The liability of each shareholder in relation to the company's debts or other liabilities is generally limited to the amount which remains unpaid on that shareholder's shares (s.3(1) CA 2006).
Number of participators. There is no statutory upper limit on the number of shareholders in a limited company. A company limited by shares can be formed with a single member (s.7 CA 2006).
Separation of management and ownership. There is separation between the management and ownership of a limited company. The owners of the company are its shareholders. Responsibility for the management of the company generally falls to its directors. Although in many instances the directors of a company will also be shareholders, this is not a legal requirement.
Share capital. A company limited by shares must have an issued share capital comprising at least one share. Each issued share must have a fixed nominal value. There are strict statutory controls over how a company can alter its share capital. There are also strict statutory controls on a company's ability to make returns of value to its shareholders.
Formation and filing requirements. A specified statutory procedure must be followed to incorporate a company limited by shares. This includes registering specified documents with Companies House. A fee is payable to Companies House on incorporation of a company limited by shares.
Constitutional documents. All companies must have articles of association, which set out the basic management and administrative structure of the company (s.18 CA 2006). The articles of association are a public document. A copy of a company's articles must be filed with Companies House on incorporation (unless the company has adopted model articles). Companies House must also be notified of any changes that are made to the company's articles during its life cycle (s.26 CA 2006).
Ongoing administration and filing requirements. Companies are subject to extensive ongoing filing and disclosure obligations. Some of these obligations occur on an annual basis (such as the requirement to file a confirmation statement and annual accounts), while others are event driven obligations (such as the obligation to notify any changes to its share capital, directors or other registered particulars). A fee is payable in relation to some of the ongoing filing requirements.
A private company limited by shares differs in several respects from a public company. The key differences include:
No minimum issued share capital. The nominal value of a private limited company is not required to exceed a specified amount. Therefore, it is possible (and common in practice) to incorporate a private company with a share capital comprising a single share with a very low nominal value (such as £1.00 or less).
No restriction on amount paid up on shares on issue. Unless its articles of association provide otherwise, a private company can issue shares on terms that the subscription price for the shares will be partly paid or nil paid on issue.
Shares cannot be offered to the public. A private company is prohibited from offering its shares to the public (s.755(1) CA 2006).
Officers. A private limited company must have at least one director (s.154(1), CA 2006). A private company is not required to have a company secretary, although it may choose to do so (s.270(1) CA 2006).
Company name. Subject to certain statutory exceptions, the company's name must include the word "limited" or "ltd" (or the Welsh equivalents) (s.59 CA 2006).
Shareholder meetings and decisions. Provided it is not a traded company, a private company is not required to hold annual general meetings unless its articles of association provide otherwise. Decisions of the shareholders in a private company can be taken by way of a written resolution in accordance with the procedure set out in Chapter 2 of Part 13 of the CA 2006 (s.281, CA 2006).
Capital reductions, redemptions and share buybacks. Private companies have more flexibility in terms of procedure and source of funds for carrying out a reduction of capital, redemption of shares or share buyback. A private company is not subject to a statutory prohibition on providing financial assistance for the purchase of its own shares.
The key characteristics of a public limited company (PLC) which differ from its private counterparts include:
Minimum issued share capital. The nominal value of a PLC's issued share capital must not be less than £50,000 (s.763(1) CA 2006).
Amount paid up on shares. Not less than a quarter of the nominal value and the whole of any premium payable on shares issued by a PLC must be paid up on allotment (s.586(1) CA 2006). There is a limited exception to this rule for shares issued pursuant to an employees' share scheme.
Type of consideration for shares. There are a number of statutory controls and restrictions on a PLC's ability to issue shares for non-cash consideration.
Shares can be offered to the public. Public companies can offer their shares for sale to the public and can therefore be listed on a recognised investment exchange. However, not all PLCs are listed companies. If a PLC is listed, it will be subject to an additional layer of rules and disclosure requirements relating to the relevant investment exchange (such as, in the case of a UK listing, the Listing Rules and Disclosure Guidance and Transparency Rules).
Officers. A PLC must have at least two directors (s.154(2) CA 2006). PLCs are also required to have a company secretary (s.271 CA 2006). The company secretary must meet the qualification requirements set out in s.273 of the CA 2006.
Company name. The name of a public company must include the words "public limited company" or "plc" (or the Welsh equivalents) (s.58 CA 2006).
Shareholder meetings and decisions. A PLC must hold an annual general meeting every year. A PLC cannot take shareholder decisions using the written resolution procedure set out in Chapter 2 of Part 13 of the CA 2006.
Capital reductions, redemptions and share buybacks. There are tighter capital maintenance restrictions applicable to PLCs. For instance, a PLC can only reduce its share capital using a court-based procedure. PLCs cannot fund a redemption or purchase of its own shares out of capital. PLCs are prohibited from giving financial assistance for the purchase of their own shares.
It is possible to convert a private limited company to a public limited company, and vice versa.
Companies limited by guarantee are normally incorporated for non-profit making functions. A company limited by guarantee has many of the same characteristics as a private company limited by shares, subject to the following key differences:
No share capital. Since December 1980, companies limited by guarantee may only be formed without a share capital (ss 5(1)-(2) CA 2006).
No liability for members to contribute while company is a going concern. The members of a company limited by guarantee undertake to contribute a predetermined nominal sum to the liabilities of the company, which becomes due if the company is wound up and a contribution is needed to enable it to pay its debts. The amount that members undertake to contribute is not an asset of the company but a contingent liability of members to contribute in the event of a winding up. Members are liable to contribute while they are members of the company, and within one year of ceasing to be a member.
Company name. The Registrar of Companies may agree to dispense with the word "limited" from the name of a company limited by guarantee if certain requirements are met (s.60 and 62 CA 2006).
If you would like more information about starting a business in the UK or would like to discuss a potential or existing business in the UK, please contact us by telephone on +44 (0)20 3126 4520 or +45 38 88 16 00 or by email at enquiries@orrlitchfield.com
