Understanding business legal structures and rules for tradespeople

How you structure your trade business affects lots of different areas. Whether you’re a plumber, carpenter, gardener, cleaner or electrician, you’ll want to make sure you comply with the legal requirements.

If you’re starting out in business you’ll need to decide on which legal form of business is right for you. You’ll need to register your intentions. This usually means letting HMRC and Companies House (for incorporated businesses) know.

What legal structure is best for your business?

If you already run a business you might want to change its legal status. A traditional path of business growth is to start on your own as a sole trader. As your business grows you may choose to bring in partners or incorporate your business.

Changing legal structure

You can switch between legal structures whenever you like. But the process can be slow and expensive. You’ll also have to make sure you comply with legal and tax rules if you do change the business structure.

Changing business name

You’re free to change your business name at any time. It may be that as your business grows, its original name is no longer the best one to reflect what you do.

Tax status

And let’s not forget about paying tax on your business profits. The amount you pay will depend on what legal form of business you choose.

These are the main legal forms of business that most tradespeople are likely to choose:

Unincorporated business

• Sole trader
• Partnership
• Limited partnership

Incorporated business

• Limited company
• Limited liability partnership

Basically, an incorporated business means the owners have fewer liabilities relating to their business. For example, for debts or legal claims against the business.

Let’s look at each of them…

What is a sole proprietorship organisational structure?

A sole proprietorship is the same as being a sole trader and is the most basic legal form of a business. It’s just you who owns the business.

Risks and rewards of being a sole trader

• There are fewer legal requirements when you’re a sole trader
• The benefits of being your own boss should be weighed against the risks you might face
• As a sole trader, you have sole legal responsibility for the business
• You are liable for its debts and any claims made against the business

Changing legal structure as you grow your business

A lot of tradespeople start as sole traders but then consider other options as their business grows. You’ll need to run through the benefits and drawbacks of changing your legal form of business. For example, whether being a sole trader or a limited company.

Registering as a sole trader

If you choose to be a sole proprietor as your legal form of business, you’ll need to register with HMRC for self-assessment. This is how much tax you’ll have to pay on your business profits. There’s a legal requirement to submit tax returns on time.

As part of your thoughts on a sole proprietorship organisational structure, it can be handy to get a rough idea of how much tax you might need to pay on your earnings.

How does a partnership business structure work?

It can be lonely running a business on your own as a sole trader. Sometimes, two heads are better than one. Not only in terms of sharing the workload. Business partners often bring different skills and ways of thinking.

A partnership business structure can be an extremely successful choice. It really depends on your long-term plans for your business. Partners are treated as being self-employed (like sole traders) for tax purposes.

There are three main types of partnership:

Partnership

Here, two or more people run a business and share its profits. They usually sign a partnership agreement. This will say what proportion of the partnership is theirs – often this is equal (50:50), but any split can be used.

Like a sole trader, the partners are responsible for the risks and liable if things go wrong.

Limited partnership

In this type of partnership, there are two types of partners: general partners and limited partners. Limited partners usually aren’t involved in the day-to-day management of the business.

There is a legal requirement for a limited partnership to register at Companies House.

Limited liability partnership

A limited liability partnership is like a limited company from a legal point of view. This is a key difference from the other two types of partnership. The partners have limited liability for business risks, debts and legal claims against the business.

One of the big differences from a limited company is that the limited liability partnership doesn’t pay corporation tax. Each partner pays the individual amount of tax due on their share of the profits.

What is a corporation business structure?

This means a business is incorporated. In other words, it is a limited company.

The word limit is important here. It means that there is a limit on the liability of the owners of the company (its shareholders) for its debts, finances and any legal claims against it.

The government notes that a limited company is the most common legal form of business. In this type of business structure, the company is a ‘legal entity’. This makes it different from individual partners in a partnership arrangement being responsible for business risks.

Tradespeople will usually be shareholders (you need at least two) as well as directors in their limited company. It’s a little more complicated setting up a limited company. But the benefits to company directors are important for you to consider.

The first thing you’ll need to do is decide on a company name. There are various rules around choosing a company name.

The legal requirements for setting up a limited company include having:

• A Memorandum – this describes who wants to set up the business and become its ‘members’
• Articles of Association – these are the legally binding rules between the company on who owns and runs it

You’ll also need to have a registered office for your limited company. This is usually your business address or you could use your accountant’s address.

What are the legal requirements for business tax?

It could be that you begin the process of deciding what legal form of business you want to start by looking at the different tax arrangements. You’ll need to look at what business taxes you’ll need to pay as a tradesperson.

There are legal requirements around filing business taxes that you’ll need to get your head around. Remember, HMRC imposes penalties for the late filing of tax returns.

FAQs

What is a sole proprietorship organisational structure?

This is a sole trader arrangement where you are the boss. You are also liable for things like debts and claims against the business.

What is a partnership business structure?

Here, two or more people form a partnership. It’s a good way of sharing the work and responsibilities. You can choose a partnership structure where your personal liability if things go wrong is reduced.

What is a corporation business structure?

These are limited companies, the most common legal form of business. Here, you will probably choose to be one of at least two shareholders in the company as well as a company director. Your legal requirements, especially your liabilities and tax obligations, are different from sole traders or partnerships.

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