The four most common business structures explained

The most common business structures are sole trader, partnership, company, and trust. The business structure you choose will determine: your business’s legal and operational risk; what control you have; asset protection; tax obligations and ongoing costs.

Sole trader is inexpensive, simple to set up and easy to maintain. Individuals have complete control over the management and direction of their business. As individuals operate under their own name, they own all their business’s profits and assets, but they are also legally responsible for all aspects of the business including any debts. They also pay tax on profits at their marginal tax rate, which may be higher than the company tax rate.

A partnership consists of two or more people running a business together. A partnership can be set up simply and cost-effectively. However, there are disadvantages, for example, partners are jointly responsible for any debts and equally liable for the actions of other partners.

A company structure consists of shareholders, company directors and managers who are typically the same two or three people.

As a separate legal entity, a company provides several advantages, namely:

• Shareholders can only lose the value of their shares and are not liable for company debts.
• Legal arrangements are in the company's name, not in the name of its directors and managers.
• The tax rate for companies is less than the highest rate for individuals.

Due to its greater complexity there are disadvantages, namely:

• Companies are more regulated than other business structures.
• The rules for establishing and running a company are more complex and costly than other business structures.
• Lessors, suppliers, and lenders are reluctant to lend money, or enter into contracts or leases with companies unless directors or shareholders provide personal guarantees.
• If directors fail to meet their legal obligations, they may be held personally liable.
• Profits distributed by companies to shareholders are taxable.

In a trust structure, a trustee holds your business for the benefit of others (the beneficiaries). The trustee can be a person or a company but is not a separate legal entity. A trading trust requires a formal trust deed that outlines how the trust operates. The trustee is legally responsible for the operation of the trust, and liable for its debts. Commonly however, the trustee is a corporate trustee, which can reduce liability. A trust can be tax effective due to the flexibility of its asset and income distribution. It can't distribute losses however, only profits. Trusts can be difficult to dissolve or make changes to once established.

A Scammell & Co commercial lawyer can provide legal advice on a wide range of business issues. For further information on our commercial law services please follow the link here