At a glance

When you start a business you must operate through a trading structure or "vehicle". Three types of structure are commonly used in the UK:

  • The sole trader
  • The partnership
  • The company

There are different variations of both partnership and company:

Partnerships:

  • Conventional partnership
  • Limited partnership
  • Scottish limited Partnership
  • Limited Liability Partnership (LLP)

Company:

  • Private company:
    • Limited by shares
    • Limited by guarantee
  • Public company

Different businses vehicles can also combine to operate together as Joint Ventures, or in partnerships.

Under European regulations, two alternative vehicles can be formed in the UK for activities within the EU:

  • The European Economic Interest Grouping (EEIG)
  • The European company, Society Europaea (SE)

When you start a business in any other country than the UK (EU or otherwise) you will find a range of additional trading vehicles. These may be similar to those used in the UK, but different legal principles may well apply. In nearly all other countries you will need to appoint a local adviser to set up your business as it cannot be done remotely.

What’s new?

In 2015 the Office of Tax Simplification (OTS) conducted a review of trading vehicles and in 2016 it opened a discussion on the introduction of two new types of trading entity:

  • The SEPA: a sole trader with semi-limited liability
  • The Lookthrough Company: a company limited by shares that would be taxed transparently, i.e. as a sole trader.

The discussion ended on 30 September 2016 and in November 2016 the OTS recommended that the SEPA be developed into a formal proposal, but the lookthrough company should be dropped.

See Small company reforms: OTS say 'No' to lookthrough, 'Yes' to SEPA

Overview and FAQs

Trading vehicles (UK)

The sole trader:

A sole trader consists of one person, who is in business on his own account. He is referred to as being self-employed.

Key features:

  • The business and its owner form one legal entity.
  • This is a very flexible way to trade, and there are more sole traders than any other business vehicle in the UK.
  • The sole trader is personally liable for all the debts of the business; his personal assets are at risk and if the business fails, he may go bankrupt.
  • All the profits of the business are taxed as if the personal income of the sole trader.
  • The sole trader may employ staff, but he himself is not subject to any form of employee taxes.
  • A sole trader cannot rent his own property to his business as he and the business are one and the same (he cannot charge himself rent).

The partnership

A partnership is legally defined as two or more persons carrying on in business with a view to profit. There are different forms of partnership and they are governed by different partnership acts. These create “defaults” as to the way that this form of vehicle is regarded in law.

Certain persons are not able to form partnerships these are:

  • Charities
  • Not-for profit organisations

Property partnerships:

Two or more persons who hold a joint or common interest in land are not, according to the Partnership Act, in legal partnership, even though they may split the profits generated by their land or buildings. For tax each is assessed on his share, no partnership tax return is required for a property business.

By concession a trading partnership which also has insubstantial income from land and property will still be assessed as if all its profits are trading profits.

Planning point: partnerships are relationships and all human relationships may go wrong. Create a partnership agreement to determine (the following list is an absolute minimum):

  • Profit share
  • Capital contributions
  • How to deal with the arrival and departure of a partner
  • Succession
  • Death of a partner.
  • Divorce of a partner (essential if you are income shifting).

There are four different types of partnership:

The conventional (or general) partnership

The Limited Partnership

The Scottish Limited Partnership

The Limited Liability Partnership.

The conventional partnership

This is governed by the 1890 Partnership Act

Many of the key features of this form of partnership are similar to those for a sole trader:

  • Partners are responsible for one another’s debts.
  • Partners are taxed on all the profits, although their share of the profits will vary by agreement.

There are some significant differences:

  • If the partnership makes a loss, those partners who are not fully participating in the business may be restricted from claiming sideways loss relief (offsetting losses against other income).
  • Individual partners may rent property to the partnership to use in its business, and charge it rent.

The limited liability partnership (LLP)

This trading vehicle is a sort of cross between a conventional partnership and a company; it has the best features of each. LLPs are governed by the 2000 Limited Liability Partnership Act and the 2006 Companies Act.

Key features

  • A LLP is a separate legal entity to its members (the partners).
  • LLPs have designated partners who are the equivalent to company officers.
  • LLP accounts are filed with Companies House.
  • Partners have limited liability unless:
    • The LLP becomes insolvent, and the partners knowingly allowed this to happen, in which case they may be required to repay their profits of the previous two years.
    • A partner is found to be at fault at a time when he was acting under his own personal capacity.
  • A LLP is taxed transparently, as if it were a conventional partnership.
  • Losses are restricted in proportion to each partner’s capital contribution.
  • LLPs are subject to substantial tax anti-avoidance legislation.

The limited partnership

This type of partnership is governed by the 1907 Limited Partnership Act.  It is not to be confused with a limited liability partnership (LLP). Limited partnerships are popular when you are structuring a private equity and investment fund, but they are not terribly suitable if you are looking for a flexible trading vehicle in general terms (use a conventional partnership or LLP instead).

Key features:

  • At least one partner must have unlimited liability, he is referred to as a “general partner”.
  • Limited partners’ liability is capped, in the event of business failure (unless there was fraud or something similar) they will only lose the capital contribution that they may have made to join the partnership.
  • The common set-up is that the limited partner will provide initial funding. It is not permitted to participate in management or bind the partnership.
  • A limited partnership’s entitlement to losses is restricted pro-rata to its capital contribution.

A Scottish limited partnership (SLP)

  • This type of partnership is governed by the 1907 Limited Partnership Act.
  • It is not to be confused with a limited liability partnership (LLP).
  • Under Scottish law a SLP is a combination of a conventional partnership and limited partnership.

SLPs are, like limited partnerships, popular for structures for investment funds.

Key Features:

  • A SLP must have one general partner and one limited partner.
  • The limited partner(s) are not permitted to take any part in management of the SLP.
  • It can hold assets, make contracts, sue and be sued and act in many ways as if it is a separate legal entity to its owners.
  • It is taxed transparently, as a conventional partnership.

 See Partnerships: changes to tax rules since 2013/14

The limited company

There are two main forms of company:

  • Private
  • Public

A private company can be unlimited, or limited by shares or guarantee. 

Unlimited companies and companies which are limited by guarantee tend to be used for activities which have little or no commercial risk, or are run as non-profit making or charitable companies.

Company limited by shares

Key features:

  • A company is a separate legal entity to its owners and its directors.
  • A company has an authorised share capital, and shareholders invest in the company and own its shares.
  • It is taxed on its profits. Its owners are only taxed when the company distributes its profits to them.
  • The company is run and managed by its board of directors.
  • A company secretary is required to maintain the company's statutory records.
  • A company may be a “single member” company, which is owned by one individual who is both its director and secretary.
  • In the event of a company’s insolvency, the shareholders will generally find that their shares are worthless; they lose the capital that they have invested in them. If any amount of share capital is unpaid, the shareholders will have to settle this.
  • In the event of a company's insolvency, its directors may have to account to creditors if it is proved that they have suffered a financial loss as a result of their actions.

As shareholders and office holders may fall out, it is essential to draw up:

 

Public company (PLC)

A public company or PLC is set up in a similar way to a limited company, except that it is permitted to apply for listing on a recognised stock exchange and to offer its shares to the public to raise finance.

Key features

  • A minimum issued share capital of £50,000, of which 25% must be paid up.
  • Detailed disclosures are required under listing and exchange rules for reporting company information and directors' interests.
  • A PLC is governed by an executive board of directors and non-executive directors.
  • Directors should comply with the rules of corporate governance.

Joint venture (JV)

A JV is an arrangement made between two or more parties to work together. It will typically be set up as a company (referred to as a joint venture company (JVC) or as a partnership (generally using a LLP).

Key features:

  • A JV is not a legal entity, it is just a term used to cover an arrangement.
  • Set up via another trading vehicle it may have legal capacity to enter into contracts or be sued.
  • A range of different tax considerations will arise as a result of a JV, depending on the different types of legal entities that formed it.

European trading vehicles

European Economic Interest Grouping (EEIG)

The EEIG is a joint venture vehicle. It is formed in one member state for the use of different European Union (EU) legal entities and can operate within the EU.

Key features:

  • It has no capital requirement.
  • It is transparent for tax purposes (any tax it makes is taxed as if it is the income of the EU legal entities which are its members).
  • It has the legal capacity to enter into contracts and be sued.

Societas Europaea (SE)
A SE is an EU public limited company. It must have a minimum subscribed amount of EUR 120,000.

A UK PLC can convert into an SE.

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