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How to select the best business structure for your startup

Registering your business is one of the most important things you can do at the early stages of your startup. It helps you to solidify your business legally and prevents the business being exploited when it comes to trademark and patent matters or contracts.
Equally importantly, it helps to protect the founders and gives you a degree of insulation from any financial issues that may arise from the startup if things don’t go as planned.

While most people know that a limited company is the way to go for most startups, you might not be aware of the three options available here in the UK and the relative benefits of each one.

Company limited by shares

A company limited by shares is one that has its ownership distributed among shareholders whose shares have a specific amount of value or percentage attached to them. It is also possible for a single person to own all the shares in a private limited company whose shares are not traded on the open market. Corporation tax will be paid on profits, after which the rest will be shared among the shareholders as dividends.

The way the limitation of liability works under this business structure is that if the company wounds up and has to settle debt in excess of its assets, each shareholder will only have to pay the worth of the shares they hold. The exception to that limitation of liability is if as a company director, you had given your personal guarantee to cover any particular transactions that led to the debt.

Company limited by guarantee

Companies that are limited by guarantee neither issue shares nor have shareholders. They are run by members and appoint or remove directors through decisions at annual general meetings.

In the process of being registered by you or a company formations firm, each member would have the amount they are guaranteeing to cover stated in the company’s articles. Even though the guarantee is commonly pegged at just £1 each, the same exception of personal guarantee will also apply in this structure.

The reason why this structure is most often used by clubs, charities and social enterprises is that dividends cannot be paid from the company’s profits. By law, all income must be put towards the company’s upkeep and societal benefit.

Limited liability partnership

This business structure is a hybrid of a normal partnership and a company limited by shares. Rather than shareholders, it has members and is governed by partners as opposed to directors.

There is a minimum requirement of two people to form an LLP, but the law also allows for another company to be a member and partner. This means that it is possible to own a company limited by shares and then form an LLP with it to retain total control of the company’s activities.

As with the other two, the partners are protected in their personal capacities since the company will be answerable for its own debts as a recognised corporate personality.

In all, making the decision as to which structure to go with is something that you need to do only after spending enough time considering exactly what trajectory you plan for your business to follow. Consult professionals with experience in this area so you’ll be certain you’re doing what’s best for you and your startup.

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