Types of business entity
Brief overview of different structures
Type What is it? Advantages Disadvantages
Sole trader Someone who runs a business on his own as an → Easy to form → Unlimited liability for
employed person. They are: → Freedom to run as business debts: personal ones
✔ Right to make all the decisions affecting the owner sees fit may be used to repay debts
business; → Sole decision-maker → Lacks status of incorporated
✔ Owns all the assets of the business; → All profits belong to forms
✔ Is responsible for paying income tax on all the owner → No day-to-day support
profits of the business; and
✔ Has unlimited liability for the debts of the
business.
Partnership Governed principally by the Partnership Act 1890: see → Very easy to form → Unlimited liability for firm’s
below for more detail. (only require two debts
✔ Occurs where two or more persons run and own a people) → Decision making can be
business together with a view to make a profit. → Freedom to run as cumbersome
✔ Is unincorporated – NOT a body corporate owners see fit → Lack of written agreement
→ Support of joint lead to uncertainty
decision making → Do not register anywhere -
→ All profits belong to Lack status of incorporated
owners – the forms
partners → Leaving partner must be
brought out by remaining
partners (may not be
favourable)
Limited ✔ A company in the UK is formed by registering → Limited liability for → Must register to set up
company certain documents with a public official, in business debts → Extra formality and costs to
accordance with the Companies Act 2006. → Can be owned, run
✔ Has separate legal personality managed or → Extra legal duties and
✔ Decisions are made either by the company’s registered by just one potential liability for directors
directors or shareholders. person → Information (inc finances)
o Directors run the company. → Greater status than made public
o Shareholders are the owners. other forms → Profits earned by company,
✔ Not subject to income tax, but corporation tax → Potentially larger not owners directly
✔ Liability is limited to its constitution – CA 2006, pool of investors
s3(1). Can be: Limited by shares (more usual) or
guarantee
Limited A form of unincorporated business is established → Limited liability for → Minimum of 2 members
liability under the Limited Partnerships Act 1907. business debts – needed to be set up
No shares, shareholders or directors – Liability is Members get to → Must register to set up
partnership
limited to amount each member invests in, agreed in protect their assets → Information (inc finances)
(LLP) the partnership agreement they own made public
✔ BUT must be at least one general partner who has → Freedom to run as → Some extra formalities and
unlimited liability, similar to partnership business owners see costs to run
✔ Unlike ordinary partnerships, LPs must be fit
registered with the Registrar of Companies. → Support of joint
decision-making
1
Brief overview of different structures
Type What is it? Advantages Disadvantages
Sole trader Someone who runs a business on his own as an → Easy to form → Unlimited liability for
employed person. They are: → Freedom to run as business debts: personal ones
✔ Right to make all the decisions affecting the owner sees fit may be used to repay debts
business; → Sole decision-maker → Lacks status of incorporated
✔ Owns all the assets of the business; → All profits belong to forms
✔ Is responsible for paying income tax on all the owner → No day-to-day support
profits of the business; and
✔ Has unlimited liability for the debts of the
business.
Partnership Governed principally by the Partnership Act 1890: see → Very easy to form → Unlimited liability for firm’s
below for more detail. (only require two debts
✔ Occurs where two or more persons run and own a people) → Decision making can be
business together with a view to make a profit. → Freedom to run as cumbersome
✔ Is unincorporated – NOT a body corporate owners see fit → Lack of written agreement
→ Support of joint lead to uncertainty
decision making → Do not register anywhere -
→ All profits belong to Lack status of incorporated
owners – the forms
partners → Leaving partner must be
brought out by remaining
partners (may not be
favourable)
Limited ✔ A company in the UK is formed by registering → Limited liability for → Must register to set up
company certain documents with a public official, in business debts → Extra formality and costs to
accordance with the Companies Act 2006. → Can be owned, run
✔ Has separate legal personality managed or → Extra legal duties and
✔ Decisions are made either by the company’s registered by just one potential liability for directors
directors or shareholders. person → Information (inc finances)
o Directors run the company. → Greater status than made public
o Shareholders are the owners. other forms → Profits earned by company,
✔ Not subject to income tax, but corporation tax → Potentially larger not owners directly
✔ Liability is limited to its constitution – CA 2006, pool of investors
s3(1). Can be: Limited by shares (more usual) or
guarantee
Limited A form of unincorporated business is established → Limited liability for → Minimum of 2 members
liability under the Limited Partnerships Act 1907. business debts – needed to be set up
No shares, shareholders or directors – Liability is Members get to → Must register to set up
partnership
limited to amount each member invests in, agreed in protect their assets → Information (inc finances)
(LLP) the partnership agreement they own made public
✔ BUT must be at least one general partner who has → Freedom to run as → Some extra formalities and
unlimited liability, similar to partnership business owners see costs to run
✔ Unlike ordinary partnerships, LPs must be fit
registered with the Registrar of Companies. → Support of joint
decision-making
1
