Starting a Business: The Different Options Available.

By Benisa Krasniqi

Are you interested by the idea of launching your own business? Perhaps you’re eager to delve deeper into the intricacies of various business structures. Nevertheless, starting a business is never easy. With a variety of options to choose from, each accompanied by its own set of requirements, navigating the path to starting a business can feel extremely overwhelming. In this blog, I’ll explore several of these options, highlighting both their advantages and disadvantages to help you make an informed decision.

First and foremost, it is crucial to grasp the differences between an unincorporated business and an incorporated business. An unincorporated business is a business with little to no administrative steps required for its formation. The business is usually treated as being ‘one’ with its owners as there is no separate legal status. On the other hand, an incorporated business demands formal registration to establish its independent legal existence from its owners.  

Now that we have got that out of the way, let’s delve into the different types of business structures available.

Sole Traders

A sole trader runs a business independently as a self -employed individual. This structure offers individuals more freedom regarding how to run the business. From marketing to pricing and designing the products, sole traders have a huge amount of flexibility. Examples include photographers, artists and even hairdressers.

Advantages

• No formal steps are required except being registered with His Majesty’s Revenue and Customs (HMRC).

• The sole trader has the upmost freedom to run the business as they see fit making them the sole decision maker.

• The owner is able to keep all profits generated by the business.

Disadvantages

• As they are the sole decision makers, they have unlimited liability for the business’s debts. This is a huge issue for sole traders as personal assets may be required to pay off debts if they cannot be paid with the money generated by the business.

• As sole traders are self-employed, they lack the legal status that incorporated businesses have.

• Sole traders run their businesses alone and have no day-to-day support.

General Partnerships

A partnership arises when two or more individuals own and operate a business together with the shared goal of generating profit. Partnerships are unincorporated as no formal incorporation procedures are required for them to come into existence. Governed by the Partnership Act 1890 rather than the Companies Act 2006, partnerships offer a flexible structure for collaborative ventures.

Advantages

• Partnerships are incredibly easy to form. Remember the days when you and your friends set up a lemonade stand and split the profits. Guess what? You formed a partnership without even knowing (two or more individuals running and owning a business together with the intention to make profit).

• Just like sole traders, partners have the freedom to run the partnership as they see fit.

• Partners have the ability to make joint decisions regarding their day-to-day activities.

• All profits generated through the partnership belong to the owners (the partners).

Disadvantages

• Similar to sole traders, partners also bear unlimited liability for the debts of the business. Again, this is due to the fact that the partners and the business are one entity.

• Although you can make joint decisions, this can be tough at times, especially if you disagree frequently.

• Due to their flexible and informal nature, partnerships lack the status of an incorporated business.

Companies

A company in the UK is established by registering specific documents with a public official in accordance with the Companies Act 2006. Companies have a separate legal personality meaning they’re a completely separate entity from their owners. Within a company, decisions are typically made by either directors or shareholders. Examples include Deloitte, Shell and Tesco Plc.

Advantages

• As companies have a separate legal personality, the shareholders of the company have limited liability for the business’s debts.

• Companies tend to usually have a larger pool of investors interested in furthering the businesses success.

• As companies are incorporated, overall, they tend to have a higher status compared to other entities.

Disadvantages

• Companies must be registered in order to be set up. This can be extremely time consuming and costly for the business’s owners.

• Companies require extra-legal duties due to their formal nature. This also means that directors can potentially be held liable if anything goes wrong.

• Certain information can be made public.

• Any profits that have been generated by the company are owned by the company rather than the owners.

While there are additional business structures such as Limited Partnerships, given their comparatively lesser prevalence, I won’t be discussing them in this blog.

The availability of a diverse range of business entities not only encourages entrepreneurship but also enables individuals to tailor their business structures to their specific needs and circumstances.

In this upcoming series, I’ll be delving deeper into the requirements of starting both a company and a partnership. We will discuss the responsibilities of shareholders and directors, as well as the concept behind a company having separate legal personality.

 Stay tuned for my next blog post, where we will take a closer look at the formation of a partnership.