UK Business Entities

Sole Trader

A sole trader business is a business that is owned and controlled by a single person.

The key characteristics of a sole trader business are as follows:

The sole trader business does not have ‘separate legal personality’ so, for example, it cannot enter into contracts or own property, meaning that any contracts entered into for the benefit of the sole trader business must be entered into by the sole trader and any property must be owned by the sole trader as well.
The person who owns and controls the sole trader business has unlimited liability for the liabilities that the business incurs.
Apart from needing to register with HMRC and file tax returns, there are no registration or filing requirements for sole trader businesses.
The sole trader business cannot issue shares and therefore cannot raise external investment from issuing shares.
Sole trader businesses do not generally have constitutional documents to govern how they are run.

Company

A company is a business form that is generally owned by the owners of shares in the company (“shareholders”) and run by the directors of the company. The most common type of company is a ‘company limited by shares’ which has the following key characteristics:

It has separate legal personality so it can, for example, enter into contracts and own property in its own name.
It is liable for the liabilities that the business incurs rather than the individuals that own or work for the company (with some exceptions, for example, certain types of director misconduct could result in the directors incurring personal liability).
Companies have a number of registration and filing requirements -transparency for the public is the price to pay for limited liability.
Most companies are owned by shareholders and a company can issue shares to raise external investment.
Companies have constitutional documents to govern how they are run, typically including a ‘shareholders’ agreement’, ‘memorandum of understanding’ and ‘articles of association’.

Companies are, generally speaking, either a ‘company limited by shares’, a ‘company limited by guarantee’, or an unlimited company.

Company Limited by Shares

In relation to a company limited by shares, the company is owned by the owners of shares in the company (‘shareholders’), who take profits from the company by way of ‘dividends’ and it is run by the directors of the company. Given that the company is liable for the liabilities that the business incurs, the shareholders’ liability is limited to the amount that they bought the shares for, or what they have committed to buy the shares for where there are amounts unpaid on the shares.

A company limited by shares can be a ‘private company’ or a ‘public company’, the key difference being that a public company is permitted to offer its shares for sale to the public whereas a private company is not. Some public companies are listed on a stock exchange, giving them greater visibility to the public/potential investors. A public company must have at least £50,000 of authorised and allotted share capital, with a minimum of 25% of the nominal value paid up on each share (s763 Companies Act 2006). Public companies are more strictly regulated than private companies (particularly those listed on a stock exchange) to give greater protection to the public investor.

Company Limited by Guarantee

With a company limited by guarantee, the company is not owned by anyone and the company is controlled by ‘members’ and/or ‘guarantors’ who give a guarantee to the company to pay a set sum if the company should go into liquidation. Companies limited by guarantee are often used instead of companies limited by shares by ‘not-for-profit’ organisations which do not need to be owned / distribute profits, such organisations include charities, community projects and clubs.

Unlimited Company

An unlimited company is a company in relation to which the shareholders’/members’ liability is unlimited, however it has the advantage of secrecy as unlimited companies do not have to file accounts at Companies House.

Community Interest Company (‘CIC’)

A community interest company, or CIC, can be limited by shares or guarantee and exists primarily for the benefit of the community rather than making a profit (only 35% of its yearly profit can be paid in dividends to shareholders).

An advantage that a CIC form might have over regular company form is that by offering a clear commitment to social goals they may find it easier to get access to certain forms of finance. They are, however, subject to additional registration and filing requirements.

An advantage that a CIC form has over a charity (in whatever form the charity might take) is that it is easier to register and less burdensome in ongoing filing requirements. CICs are however not entitled to the same tax relief as charities and it could be said that they lack the same notoriety/prestige offered by being a registered charity.

Partnership

A partnership is a business form that is owned and run by two or more people, known as ‘partners’.

The key characteristics of a ‘general partnership’ are as follows:

It does not have separate legal personality so, for example, it cannot enter into contracts or own property so any contracts entered into for the benefit of the general partnership must be entered into by one of the partners and property must be owned by one of the partners.
The partners who own and control the business have unlimited liability for the liabilities that the business incurs.
Apart from needing to register with HMRC and file tax returns, there are no registration or filing requirements for general partnerships.
The general partnership cannot issue shares and therefore cannot raise external investment from issuing shares.
General partnerships are typically governed by ‘partnership agreements’.

In addition to being general partnerships, partnerships can also be:

‘Limited partnerships’ whereby one or more of the partners’ liability is limited (usually because they are silent partners); or,
‘Limited liability partnerships’ (‘LLPS’) whereby the LLP has separate legal personality and all of the partners’ liability is limited to the amount that they have invested in the business.

Generally speaking, the key advantage that partnerships have over companies is that privacy can be maintained and administration reduced due to the lack of registration and filing requirements and they can also be more tax efficient; the key disadvantage is that liability of the partners as owners / controllers is not limited.

Unincorporated Association

An ‘unincorporated association’ is a business form which isn’t owned by anyone and is controlled by its ‘members’. The key characteristics of an unincorporated association are as follows:

It does not have separate legal personality so, for example, it cannot enter into contracts or own property so any contracts entered into for the benefit of the unincorporated association must be entered into by one of the members and property must be owned by one of the members.
The members have unlimited liability for the liabilities that the business incurs, albeit they are often indemnified by the unincorporated association in relation to such liabilities.
Apart from needing to register with HMRC and file tax returns, there are no registration or filing requirements for unincorporated associations.
Unincorporated associations cannot issue shares and therefore cannot raise external investment from issuing shares.
Unincorporated associations typically have constitutional documents to govern how they are run.

Trust

A trust is a business form that is owned by the beneficial owners and run by the trustees/protector of the trust. Trusts are also used by individuals to manage their finances in a tax efficient way. The key characteristics of a trust are as follows:

It does not have separate legal personality so, for example, it cannot enter into contracts or own property so any contracts entered into for the benefit of the trust must be entered into by one of the trustees and property must be owned by one of the trustees.
The trustees who run the trust have unlimited liability for the liabilities that the business incurs, albeit they are often indemnified by the trust in relation to such liabilities.
Apart from needing to register with HMRC and file tax returns, there are no registration or filing requirements for trusts.
Trusts cannot issue shares and therefore cannot raise external investment from issuing shares.
Trusts have a constitutional document to govern how they are run, called a ‘trust deed’.

Charitable Incorporated Organisation (‘CIO’)

A ‘charitable incorporated organisation’ (‘CIO’) is a business form that is not owned by anyone and is run by its members for charitable purposes. The key characteristics of a CIO are:

It has separate legal personality so, for example, it can enter into contracts and own property in its own name.
The CIO is liable for the liabilities that the business incurs rather than the members.
Unlike a company, CIOs are registered with the Charity Commission rather than Companies House and have to file with the Charity Commission rather than Companies House.
CIOs cannot issue shares to raise external investment.
CIOs are required to have a constitution in a prescribed form.

Mutual

The distinguishing characteristic of a ‘mutual’ is that it is owned and run by its members, who are actively involved in the business, for the benefit of the members or the community that they serve.

Mutuals can be broadly split up into: ‘registered societies’ (also known more informally as ‘societies’ and formerly known as ‘industrial and provident societies’) and ‘financial mutuals’.

Registered Societies (Societies)

Registered societies may take one of two forms: a ‘co-operative society (‘co-op’) or a ‘community benefit society’ (‘bencom’).

Co-operative Society (Co-op)

A co-operative society (co-op) is a business form that is owned by the members of the co-op and run by the directors of the co-op, but with all members having democratic control on a ‘one member one vote’ basis. The key characteristics of a co-op are as follows:

It has separate legal personality so, for example, it can enter into contracts and own property in its own name.
It is liable for the liabilities that the business incurs rather than the members.
Unlike a company, co-ops are registered with the Financial Services Authority (‘FSA’) rather than Companies House and have to file with the FSA rather than Companies House.
A co-op can issue shares to raise external investment.
Co-ops have a constitution.

Community Benefit Society (Bencom)

A community benefit society (bencom) is like a co-op, save that it must be run for the benefit of the community rather than its members (so members cannot take a profit) and it receives tax breaks on this basis.

Financial Mutuals

There are three types of financial mutual that are run for the benefit of their members: ‘building societies’, ‘friendly societies’ and ‘credit unions’. They have the same key characteristics as registered societies, save that they have their own specific regulations.

Nowadays financial mutuals provide a broad range of financial services to their members, with building societies focusing on mortgages; friendly societies focusing on welfare finance; and credit unions focussing on affordable credit.

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