Legalease Home page
Business organisations

 

Business organisations - how to choose

Legal information and advice to help you decide the type of business organisation you should choose for your business. There are many different types of businesses including sole trader, partnership, limited liability partnership, limited company, public limited company, co-operative, community interest company, social enterprise, charity.

This guide helps you to answer the questions:
* What legal forms can I choose to run my business?
* Should I run my business through a limited company?

This guide assumes you have researched the general subject of starting a business. See our page on Starting a business.

There are other types of business organisation which are not usually appropriate for new businesses but should be mentioned for completeness. These include: private unlimited company; old style limited partnerships; companies limited by guarantee; public limited companies; EU public company; and Economic Interest Groupings.

Flat Management companies, Right to Manage (RTM) companies and Commonhold associations are special types of company formed to manage a property divided into a number of separate flats or units.

Business structures in summary

Sole trader: if you require the minimum of formality and legal compliance, being a sole trader may be the way to go. You will not have the benefit of limited liability, but will not need to file accounts or other documents with Companies House. Before setting up in business, ask yourself “Am I employed or self-employed?” Read more>

Partnership: If you are going into business with someone else in the sense of sharing profits rather than just employing them, you will be carrying on a business in partnership. You will need a partnership agreement. You will not have the benefit of separate legal personality or limited liability, but will not need to file accounts or other documents with Companies House. Read more>

Private unlimited company: this is a relatively unusual type of organisation. It has a separate legal personality but not limited liability. Read more>

Legal personality”: the law may also recognise “legal persons” as having a personality separate from their individual members. Read more>

What is “limited liability”: this means that the liability of the partners or shareholders to pay the debts of the business is limited to the capital they have put in or agreed to put in. This is a valuable protection in the case of the failure of the business. However it comes at the price of greater regulation, in particular the need to file accounts.

Limited liability partnership: this type of entity is similar in structure to a partnership but has the advantage of separate legal personality and limited liability. As with an ordinary partnership, the partners should enter into an agreement, in this case known as a “members’ agreement”. Read more>

Limited partnership: this is an older form of partnership with a partial form of limited liability (Limited Partnership Act 1907). The so-called “limited partners” have limited liability but the firm must have at least one “general partner” whose liability is unlimited. The limited partners may take no part in the management of the firm’s business. Read more>

Private limited company: a private limited company has separate legal personality and limited liability. Unlike a limited liability partnership, a limited company is taxed separately from its members. Read more>

Should I run my business through a limited company?
There are pros and cons for doing business as a sole trader or in partnerhip on the one hand and through a limited company on the other. A sole trader or partnership need file no accounts or constitutional documents at Companies House. However they do not benefit from limited liability. Read more>

Other types of company

Public company: a public company has the same characteristics as a private company mentioned above but must meet in addition certain requirements. A public company is legally entitled to offer its shares or debentures to the public. Public companies are more strictly regulated than private limited companies. Read more>

EU companies: EU law provides for the incorporation of the “European Company” or “Societas Europea". Companies operating in more than one Member State have the option of establishing themselves as a single company under EU law. The European Economic Interest Grouping allows legal entities from more than one EU member state to form a grouping to pool certain resources. There is also a proposal for an EU private company. Read more>

Foreign companies: A company which is incorporated in a foreign country is generally recognised under English law as a legal entity. If it has a branch or establishment in the UK, there are registration requirements. Read more>

Flat Management companies: Right to Manage (RTM) companies and Commonhold associations. A Flat Management company is a company that has been formed to manage a property divided into a number of separate flats. Leaseholders can also exercise their right to manage the building they live in. To obtain the right to manage the leaseholders must set up a 'Right to Manage' ('RTM') limited company. A limited company could also be formed to own and manage the common parts of a development made up of separate units under 'commonhold'. This type of company is called a 'commonhold association'. For more information, go to the Companies House website Companies Act 2006 Guidance – Chapter 5

Co-operatives: A co-operative has been defined as “an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. Possible legal structures for co-operatives include unincorporated association, limited company, community interest company, iIndustrial and provident society and the European co-operative society. Read more>

Social enterprises and not for profit organisations: Social enterprise” is a relatively modern expression which has been defined as: An enterprise that is owned by those who work in it and/or reside in a given locality, is governed by registered social as well as commercial aims and objectives and run co-operatively. In the British context, social enterprises include community enterprises, credit unions, trading arms of charities, employee-owned businesses, co-operatives, development trusts, housing associations, social firms, and leisure trusts. Possible structures for a social enterprise and not for profit organisations include: unincorporated association; trust; company limited by guarantee; community enterprise company; Industrial and Provident Society/Community Benefit Society. Read more>

Charities: By definition, a charity is not a “business” in the ordinary sense as it is not run for profit. However a charity may own another organisation which is run for profit.
An organisation which carries on activities exclusively for purposes recognised by the law as charitable is commonly known as a “charity”. The legal concept of a charity has existed for hundreds of years in English law and is now governed by the Charities Act 2006.
The Charities Act 2006  lists the purposes which qualify for charitable status. Read more>

[Page updated: 12/07/2012]

 

More information>
Sole trader
Partnership
Private unlimited company
Legal personality
Limited liability partnership
Limited partnership
Private limited company
Should I run my business through a    limited company?
Public company PLC
European Union companies
Foreign companies
Co-operatives
Social enterprises
Charities