TBA & Associates

Company Formation in the United Kingdom

Doing business in the UK
Choosing the most suitable ownership structure for your business needs

Prior to making a decision, it is imperative to meticulously assess which ownership structure best aligns with your unique circumstances. The selection of an inappropriate structure may lead to unwarranted expenditures and potential risks, and a failure to address practical considerations could strain your relationships with business associates and partners.

Types of Business Entities in the UK

There are four main types of company structure in the UK:

Sole Trader
Private Limited Company
Public Limited Company (PLC)
Limited Liability Partnership (LLP)
Company Limited by Guarantee (LBG) – Non-Profit
Limited Partnership (LP)

Sole Trader (Self-Employed Status)

Requiring little initial setup and administrative burden, many new businesses opt for the sole trader status. Unlike other business structures, there’s no mandatory registration with Companies House, but the business owner must inform HMRC (Her Majesty’s Revenue and Customs). It’s important to note that a sole trader business isn’t considered a separate legal entity, which means the owner bears full responsibility for all debts and legal proceedings.

Although operating as a sole trader offers advantages such as minimal regulations and simplified filing obligations, the significant personal liability tied to this business model often serves as motivation for entrepreneurs to consider establishing as a limited company.


Private Limited Company (LTD)

Another approach to operating a business is by establishing it as a Limited Company. This involves incorporating the business with Companies House, effectively creating a distinct legal entity. While there are more regulations associated with this method, there can be potential tax benefits. Individuals involved in the business hold shares corresponding to their level of participation. In the eyes of the law, a limited company is considered a separate legal entity, separate from its shareholders. As a result, if the company is unable to meet its obligations for any reason, the shareholders are only personally liable for the outstanding amount related to their shares. If the shares are fully paid, shareholders cannot be compelled to make further payments.

Hence, it’s more precise to state that the shareholders have limited liability rather than the company itself. This situation differs from the personal liability of a sole trader or a partner in a partnership, except in cases involving limited liability partners or a Limited Liability Partnership (LLP). In these instances, a sole trader or partner may bear personal liability for any debts the business cannot cover. It’s crucial to understand that there may be situations where personal liability cannot be limited, especially for directors who might be personally liable if they engage in fraudulent or negligent behavior. In particular, directors should be aware of the potential personal liability if their company continues to trade while insolvent.

Requirements to establish a Private Limited Company
  • Appointment of Director
    A minimum of one director aged 16 or above is required to be designated.
  • Established Office in the UK
    The company must establish a established office within the United Kingdom.
  • Company Name Compliance
    The chosen company name must adhere to government regulations.
  • Issuance of Shares
    At least one share must be allocated during the incorporation process.

UK Public Limited Company (PLC)

A Public Limited Company (PLC) operates as a distinct legal entity, much like its private counterpart. Additionally, members’ liability is limited to their invested capital and the value of their shares. A distinguishing feature of PLCs, in contrast to private limited companies, is the ability to publicly trade their shares, often employed as a means to secure financial resources.

However, it’s crucial to note that the operational expenses associated with managing a PLC are considerably higher than those for private companies. As a result, this structure is typically better suited for larger enterprises. A prerequisite for establishing a company as a PLC is the issuance of a minimum of £50,000 worth of shares. Additionally, legal regulations stipulate that at least two directors must be appointed.

UK Company Limited by Guarantee
Not for Profit Company

Limited by Guarantee companies, in essence, operate as non-profit organisations. Any surplus funds generated are typically reinvested into the company to further its objectives, which frequently revolve around charitable endeavors. The individuals involved in this type of company are typically referred to as decision-makers rather than proprietors, reflecting their role in shaping the company’s mission and activities.

Types of Partnerships

UK General Partnership

The UK General Partnership, as previously described, falls under the regulations of The Partnership Act, 1890. Full partnerships, as mentioned earlier, typically comprise a membership ranging from two to twenty partners, although it’s more common to find the number of partners in a full partnership within the range of two to four.

A UK general partnership involves an arrangement where two or more individuals or entities, whether in a formal or informal capacity, engage in business as partners. In terms of asset protection, it’s important to note that general partnerships may offer even less security than sole proprietorships. This is because the actions of any one partner have a direct impact on all other partners, as each partner in a general partnership assumes personal responsibility for all the commitments made by the partnership. Consequently, the level of risk faced by each general partner escalates proportionally with the number of partners involved in the business.

UK Limited Partnership

The UK Limited Partnership, governed by The Limited Partnership Act of 1907, is an entity that has become increasingly uncommon and now accounts for less than 1% of all partnerships in the UK. A limited partnership takes shape when one or more partners invest capital in the business without actively participating in its management. This distinctive arrangement offers these partners limited liability, restricting their potential losses to the initial capital they invested.

A UK Limited Partnership (LP) forms when one or more general partners join forces with one or more limited partners to engage in a profit-oriented business as co-owners. The paramount characteristic of an LP is that limited partners enjoy limited liability, provided they refrain from participating in the management of the partnership’s operations. The obligations of the LP are primarily the responsibility of the general partners.

In a Limited Partnership, it is the general partner who remains personally liable for the entity’s debts and commitments. To mitigate larger risk exposure, a corporate entity, typically a corporation, can be established to serve as the general partner. This corporate general partner benefits from protection against direct legal actions by judgment creditors because the ultimate responsibility for debts and obligations rests with the corporation’s shareholders. By dispersing share ownership, individual risk exposure is significantly minimized. Even without a corporate general partner, risk can be diversified by distributing limited partnership shares. If a judgment creditor secures a charging order against one partner, the order pertains exclusively to that partner’s share in the distributions from the partnership, rather than affecting the entire business.

UK Limited Liability Partnership (LLP)

A UK Limited Liability Partnership (LLP) shares certain similarities with a standard partnership, but it distinguishes itself by offering members reduced personal liabilities concerning business-related debts. However, compared to the traditional partnership structure, LLPs entail more extensive administrative obligations. In fact, an LLP operates more akin to a Limited Company. In terms of liability, the Limited Liability Partnership itself bears responsibility for the debts accrued during business operations, rather than individual LLP members. Consequently, LLPs are primarily recommended for profit-driven businesses.

A UK LLP can be established by two or more individuals or entities, regardless of their UK residency status, for the purpose of conducting trade or business. To initiate an LLP, partners are required to submit an incorporation document to Companies House. The ownership and management structure within an LLP typically align, and the particulars of this structure and partner relationships are subject to agreement among the involved parties. Such agreements may be documented separately in an LLP Agreement, which bears resemblance to a Partnership Agreement.

UK LLP Advantages

  • Limited Personal Liability: Members of an LLP are not personally liable for the debts and contractual obligations of the LLP.
  • No Joint and Several Liability: There is no joint and several liability for the negligence of any individual member.
  • Separate Legal Entity: LLPs are recognized as separate legal entities, enabling them to own property, engage in legal actions, and be subject to legal actions in the name of the LLP.
  • Limited Liability in Winding-Up: In the event of winding-up, members’ liability to contribute is restricted to the amount they have agreed to contribute, as stipulated in the LLP agreement.

LLP Disadvantages

  • Disclosure Requirements: An LLP must disclose certain information, including accounts and auditors’ reports, to the Registrar of Companies, which subsequently becomes public.
  • Ownership of Contributions: Money and property contributed to the LLP become the property of the partnership, unless otherwise specified in the partnership agreements, and contributors typically have no entitlement to reclaim these contributions.
  • Regulatory Obligations: LLPs are subject to regulatory obligations such as auditing and filing requirements.

Limited Company vs Partnership
Advantages and disadvantages

When determining the suitable business structure, whether to operate as a limited company, partnership, or opt for limited liability partnership (LLP) status, which combines aspects of both, it is imperative to make the right choice. This decision has wide-ranging implications, encompassing tax considerations, the future succession of the business, and a host of other factors.

While there is a common assumption that incorporation offers significant tax advantages and enhanced financial security for directors, this is not universally true. In certain cases, running as a partnership can be the most effective and rewarding approach.

Each business should evaluate its specific goals within the current context and decide on the most appropriate path to follow. Choosing the optimal operational structure for your organization constitutes just one facet of comprehensive business planning. Before we delve into the distinctions between limited companies and partnerships, let’s briefly review some fundamental differences.

Limited Company

A limited company constitutes a distinct legal entity, overseen by directors and owned by shareholders, often including the same individuals. Every company is obliged to disclose its annual accounts, although small enterprises may provide a simplified financial summary, and those with an annual turnover below £5.6 million are exempt from auditing.


In contrast, partnerships are owned and managed by individual partners who bear personal and joint responsibility for the actions of their fellow partners. This underscores the importance of having a partnership agreement or deed. Partnerships are not obligated to publish or audit their accounts, regardless of their size. However, there is a growing push for greater transparency.

Some of our clients have established limited liability companies to operate alongside their partnership, directing different types of projects to these entities. This strategy offers maximum flexibility and safeguards the business. It also serves as a valuable mechanism for ensuring continuity, as partners leaving a partnership can lead to dissolution, whereas a company can persist even when directors retire or depart.

The advent of the limited liability partnership, introduced on April 6, 2001, marries the advantages of limited liability with the framework of a traditional partnership. It’s no surprise that an increasing number of businesses, spanning various sizes, are contemplating this structure.

As members of an LLP enjoy limited liability, it is essential for the protection of those engaging with an LLP that the entity maintains accounting records, compiles and submits audited annual accounts to the registrar of companies, and lodges an annual return, mirroring the requirements for companies. The exemptions and limitations available to companies regarding submitting abbreviated accounts and audit exemptions also apply to LLPs.

A limited company constitutes a distinct legal entity, overseen by directors and owned by shareholders, often including the same individuals. Every company is obliged to disclose its annual accounts, although small enterprises may provide a simplified financial summary, and those with an annual turnover below £5.6 million are exempt from auditing.

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