Understanding Business Structure and Financial Liability

Every type of business structure has its pros and cons: but how does setting up a company affect your financial liability? In this article, we’ll look at the main variants of business structure and explain what each one means for your personal liability.

When it comes to setting up a business, people often ask two key questions:

1. What type of business structure should I set up?

2. Why choose a limited company?

While there are lots of differences between the various types of business structure, both in terms of tax and the reporting you’ll have to carry out, one of the main differences to consider is how your personal financial liability is affected.

Your new business and your personal financial liability

Starting a business is likely to be one of the most daunting things you do in your career, so limiting your liability can be a very welcome relief. You can do this through business liability insurance. However, for big claims, you may not be protected completely.

Here we take a look at three of the main business structures:

  • Sole trader
  • Business partnership
  • Limited company, whether private or public

As well as the implications each of these have for your personal financial liability.

Business structure: sole trader

As a sole trader, or self-employed as it may also be called, you have sole responsibility for your business. The benefit of this is that you can keep all profits after tax. However, it also means that you’re liable for all or any of your business debts. This puts your personal wealth and assets at risk too.

When you’re a sole trader you also have personal responsibility for hiring your employees. There’s also unlimited personal liability for what those employees do in the course of working for your business.

Business structure: partnership

You know you want to go into business, but you don’t want to work alone. You also don’t wish to set up a limited company, setting up in a business partnership may be an option. This means that you don’t have to complete all of the admin tasks that a limited company has to do. You can also share the load of running your business with another person. While you don’t necessarily need to complete any legal paperwork in order to set up a business partnership, it can be a good idea to have paperwork drawn up by a solicitor. This could have company protocols and the business split in terms of both profit and liability included.

Being in a business partnership means that you have someone else to share the responsibilities as well as the profits with. It also means having to take on your share of the liabilities of your company. This is as well as your employees and the other owners in the course of working for your business.

Business structure: limited company

Setting up a limited company – whether private (ltd) or public (plc) – may seem a little less straightforward in terms of a business structure. However, it can be a good move if you’re planning to stay in business for a long time. In terms of your own personal financial liability, it’s very worthwhile. A limited company can be set up with just one owner or shareholder, or with numerous. And the personal liability for each of those owners is limited. This means that if the business runs into financial difficulty, their personal assets, such as their property and their own savings, will not be affected.

Many new businesses owners wishing to limit their financial liability choose to set up as a private limited company, giving them the scope to grow, safeguarding their business name and protecting their personal liability too.

Setting up a private limited company doesn’t take the time or effort that many people think it will. And if you use a formations agent, it’s cost-effective, too. Especially considering you’ll know that everything that you need to consider will be laid out and completed for you. With The Formations Company, the E-Formation package can take as little as three hours to complete and costs less than the price of your Companies House registration.

For more information on limited companies and how to set one up, continue browsing the articles in our help centre or check out our company formation guide.

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