Business structure – what is a business structure?
A business structure refers to how a company is organised, in regards to its legal status.
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When setting up a company, deciding on an appropriate business structure enables your company to be formally acknowledged legally and provides guidelines for how the business should be run.
What does a business structure do?
The business structure states who owns the company, how its profits are distributed, and which managers perform what tasks. It's also necessary for tax and liability purposes, as depending on the structure of the business, the business will be taxed differently, and managers and owners will have different levels of responsibility in the event of wrongdoing or a lawsuit.
Types of business structure
In the UK, there are 3 main types of business structures. These are sole proprietorships, partnerships, and limited companies.
A sole proprietorship, also known as ‘sole trader’, ‘individual entrepreneurship’ or simply ‘proprietorship’, is a type of business that is owned and run by one individual. There is no legal distinction between the owner and the business. Despite its name, a sole proprietorship does not necessarily mean one person works alone; the sole trader can still employ other people.
A partnership is a business structure where two or more people jointly own the company. The partners share responsibility for managing the company, and responsibility for any profits and losses the business generates. The income from the business is paid to partners, who can claim it on their personal tax returns. Unlike corporations, a partnership is not taxed separately on its profits or losses.
A limited company is a business structure that recognises the business as a separate legal entity to its owners. Unlike sole proprietorships or partnerships, the liability is limited to the company, making shareholders liable only for the amount of share capital that they have subscribed to.
Changing your business structure
It's possible to change the structure of your business at any point. You can begin your company with one structure, and switch to another at a later time. For example, a company may begin as a ‘sole proprietorship’ and then expand to a ‘limited liability company’. However, a structural change requires careful consideration, planning and consultation from professionals and colleagues.
Taxation is a common reason to consider changing your business structure. Different structures offer different tax benefits and sometimes a change to your company structure can simplify your tax filing. Changing your structure may also increase your legal protection as a business owner. If you are seeking outside investment or funding, it may also be necessary to change your business structure so as to improve your credibility as a company.
Changing a company’s business structure can be highly effective, but there will be some unavoidable disruption and additional work. Understanding why the change is necessary is therefore essential and you must make sure you know what new licenses, insurance or registrations are required.
Once the change has been sufficiently organised and decided upon, it is time to inform all employees. The information you give them needs to include what the changes will be, if any, how the changes will be implemented, and what the short and long term effects will be.