A Simple Guide About Business Entity Types!

A Simple Guide About Types of Business Entities!

27/05/2022Business , Business Growth Ideas

We all know that the main types of business entities are known to be Limited liability companies (LLC), Limited liability partnerships, traditional partnerships, and sole traders in the UK. Moreover, community interest companies (CIC) along with charities and public limited companies (PLC) are also included in the list but not in the limelight of prominent business structures.

It is important to identify what is the most favourable business entity according to your business plan. The process of making such a decision is complicated as well. Before making such a decision, it is recommended to get to know the pros and cons of each business entity. This will further help to choose your business structure and grow in your plan ahead.

In this detailed guide, we have gathered the information from research that will help you to learn about the multiple business entities. This will make it look easy to choose the best option for your business plan. In this competitive business environment, making the right decision will bring you one more step closer to your business growth.

 

1- Sole Trader

Sole traders are also known by the name of a sole proprietorship. This is one of the types of business entities that is usually carried out by a single owner. In this business structure, the owner is liable for the profits and handling of debts. The owner is not considered a legal entity or company here.

Like other business structures, there are several pros and cons associated with this type of business structure that is explained in the following.

By having an understanding of the pros and cons of this business entity, you will be more clear about choosing the right option for you. Some prominent factors and pros are listed below:

  • Flexibility
  • Saving Money
  • Less Filing and Fewer Regulations
  • Minimal Administration Requirements

1. Flexibility: Being a sole trader brings a lot of essential flexibility because you are the owner who is free to make business decisions. Everything related to your business affairs is under your control as this is not a legal entity or a company.

2. Saving Money: There are many opportunities to save yourself from business expenses due to less charged taxes and fewer regulations elated to business activities.

3. Less Filing and Fewer Regulations: The bright side is that you are saved from annual returns. Statutory records and accounts are totally your choices to maintain in your own specific need. This makes it possible to find an escape from the submission of corporation tax returns. However, the requirement of paying your income tax and filing a personal annual tax return is still there to handle.

4. Minimal Administration Requirements: As we know about the requirement of registering our business at the companies house, in case of sole trading this is not mandatory. However, HMRC should be informed about it to record personal tax calculations.

If we talk about the cons of a sole trader, the following are in the limelight most of the time.

  • Personal Assets and Business Losses
  • Business Debts and Owner’s Liabilities

1. Personal Assets and Business Losses: As sole traders are not registered with companies’ houses. There is a lack of prestige when it comes to dealing with business losses. It has been observed that several business owners switch their business structures when they plan to expand their business.

2. Business Debts and Owner’s Liabilities: Handling the experience of business debts totally comes under the liabilities of the owner in this business structure. The risk factor involved in taking the debts is the management of the owner. This risk can affect the personal assets of the owner as both the personal and business assets are considered the same. Unlike the limited companies, there is no option for failsafe. This increases the risk factor.

 

You can count on us in case you are seeking professional advice to help you choose the right business entity for your business plan. Call us on 02086868876 or email us today.

 

2- Limited Liability Companies

Do you know what the common form of company is in the UK? Limited Liability Company also known as the abbreviation of LLC is a famous business structure. Under UK law the limited liability company is a legal entity. Due to this, the owner has limited liabilities in this kind of business structure.

Moreover, unlike the sole traders, not only the owners are liable to handle the business losses and the debts. There are two forms of a limited liability company and they are:

Individuals who aim to initiate their own business or expand the limit of freelancing services are most inclined towards private limited companies. However, an initial public offering (IPO) is a process that will help you to convert your private limited company to a public limited company if your business grows and takes off on a large scale. The prominent advantages of the limited liability company are explained below.

 

Professional Status: Because of the high scale structure, the professional status and impression as a business entity improve when you are associated with a limited liability company.

Minimising Personal Liabilities: In the case of sole traders, the liabilities belong to the only peon. However, in the case of a Limited Liability Company, the responsibilities are shared and hence this minimises your personal liabilities.

 

All types of business entities have their cons. Disadvantages in the case of this business entity are fewer but the notable ones are explained below:

  • Your company and personal information are publically available.
  • The company is required to be incorporated with the companies house.
  • The accounting standards are high which makes the processing time consuming and complicated.

 

 

You can even reach out to us by giving a visit to our office to discuss your requirements for the basic consultation. Our experts will ensure to provide the best services to provide instant help and answer your queries. 

 

3- Partnership

As the name depicts, the partnership is always between two or more businessmen. In the UK there are two types of partnerships, general partnership and limited partnership.

General Partnership: This kind of business structure is just the same as the sole traders, however, the owners are more in this case. A general partnership is not taken as a legal entity as well. Looking at the pros and cons, there are plenty of them. See the details below:

The pros of a general partnership are just similar to the sole traders. It is just that the liability is shared among multiple owners.

  • Tax
  • Maximising Experience

Tax: Since general partnerships are not considered a legal company so they are free from paying corporation tax.

Maximising Experience: The factor of having partners helps to maximise the experience. This will grow the business better than the sole traders.

 

4- Limited Liability Partnership

This kind of business structure is always required to register at the company’s house. The profits made by this entity are often shared among two or more proprietors. This is a profit-driven business structure. Law and accountancy use this kind of business structure mostly. Just like all other business entities, this entity is also associated with its own kind of pros and cons. See the details in the following:

Some prominent pros include the following in the case of a limited liability company:

  • Rich Experience
  • Risk Factor
  • Tax

1. Rich Experience: Just like other traditional partnerships, limited liability partnerships also come up with maximising the experience. The need is to make the right choice of the partner that will help to grow the business instantly.

2. Risk Factor: The risk factor in this business structure is limited as the owners can take the limited risk of debts to ensure the business grows. This helps the business values swiftly in the market.

3. Tax: Under UK law, it is not required to pay corporate tax by the limited liability partnership.

The cons of a limited liability partnership include the following:

  • Filing
  • Lack of Flexibility

1. Filing: The requirement of filing the records annually, annual returns submission and the approval of financial statements are associated with a limited liability partnership.

2. Lack of Flexibility: Because of the factor that the company is owned by multiple owners and directors, there is no flexibility in making the decisions. You have no right to name the company or make other business decisions on your own.

 

The Bottom Line

As the discussion of types of business entities is coming towards wrapping up finally we can say that there are multiple factors involved in making a decision about suitable business entities. You can think about whether you can handle the responsibility of business losses alone and have the profits all by yourself. Ask yourself if you are ready to rely on your business directors to make important business decisions.

If you will consider these elements and questions before making the decision, this will help you to make the decision with a clear mind and confidence.

 

Disclaimer: The information about the types of business entities provided in this article is general in nature and does not intend to disregard any professional advice.


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