How to choose the right UK company type as a non UK resident?

As a non-resident, starting a business in the UK is a promising opportunity, but before you begin your choice of your business activities, location or other important information, you should first put into consideration the type of business structure you want to operate. The type of business structure your business operates on will determine the way your company's taxation is, the level of company liability you take on, your ability to be able to raise funds and the legal obligations you need to abide by. Making the wrong choice of business structure can negatively affect your business with financial complications, legal challenges, or limitations on the future growth of your business.

The UK has several business structure options available to non-residents, with all having their good side and bad sides depending on how well they fit the business itself. Some of the business structures are suitable for entrepreneurs looking to keep it simple while others are suitable for businesses who plan to grow rapidly and also attract future investors. The right business structure will have to depend on the nature of your business, how well you can tolerate business risks, how much control you want to have over your business and if you intend to hire employees or add business partners.

Whether you're a self-employed individual or a freelancer looking for a simple business structure, a group of professionals who want to upscale business in partnerships, or an entrepreneur trying to expand in the business world, this article will help in guiding you in choosing the right business structure for the nature of your business. Once you have chosen the right business structure, your aim will be to upscale your business.

Factors Affecting Choice of Business Structure

Selecting a business structure is one of the most important aspects for entrepreneurs, investors and business owners. The choice of business structure is influenced by several business factors such as the legal obligations, financial responsibilities, and operational flexibility of the business. Before picking a business structure, you should consider the following factors:

Nature of The Business

The nature of the business you intend to incorporate has a major role to play in the business structure. For instance, for a sole trader setup, it is ideal for a freelancer due to its simple structure while a tech startup who is aiming for rapid growth in the industry and attracting investors can go for a limited company. For those individuals who would love to join hands together to manage a business and work on their ideas, a partnership is preferable. It is important to always align your business goal with a structure that suits it.

Liability and Risk Exposure:

Before choosing a structure, you should always analyse and understand your tolerance to personal liability. Business structures such as sole proprietorship and general partnership are known for exposing owners to unlimited personal liability, which means that their assets are at risk if the business goes into debt or acquires a legal claim. On the other hand, limited companies and limited liability partnerships (LLP) offer a good amount of protection to owners by reducing personal liability to only the percentage of the amount invested in the business.

Taxation Considerations

All business structures have different tax obligations. Below are the tax obligations of the different business structures available to non-residents:

• Sole Traders and Partnerships: the profits of the business are taxed as personal income which subjects them to Income Tax and National Insurance Contributions.
• Limited Companies: Profits of the company are subjected to corporation tax and shareholders of the company as well as directors may face taxation on dividends or payments received.

Taking these tax implications into consideration is important for non-residents trying to select a business structure to start up with.

Administrative Complexity and Compliance:

Administrative size also varies with the business structure

• Some Traders: have minimal paperwork and they have straightforward compliance requirements.
• Limited Companies: This type of business structure is a complex compliance system. Companies must comply with the regulations which include filing annual accounts and also maintaining statutory records.
• Partnerships: Although they have a strict compliance system, they do not have too much workload compared to limited companies.

Funding and Capital

Your funding and Capital options also have a great contribution to your choice of business structure in the UK

• For sole Traders and Partnerships, it is difficult to achieve external funding due to perceived risks.
• For limited companies, achieving external funding is easier which can be done through equity investment, grants and public funding. This is because investors find the limited liability more reliable.

Control and Decision-Making Power

Some Traders have full control over their companies, partnerships share control between partners and in limited companies, power and control are shared among directors. You can also have full control over a limited company if you are the sole director and shareholder of your company. You should consider if you're planning on sharing power over your business with anyone before choosing a particular business structure.

Profit Sharing

Every business structure has a different way profits are distributed; for sole Traders, the entrepreneur gets all the profits after tax, and for partnerships, the profits are divided among the partners depending on the partnership agreement. For limited companies, if there's one shareholder, the profit is theirs after tax but if there are multiple shareholders, the profits are shared according to the number of shares they own.

Scalability and Flexibility

If you are looking forward to rapidly expanding your business in the near future, a limited company is the best option available. For some Traders, there is a restriction to how far the business can expand due to the limitation of available resources.

Legal and Regulatory Requirements

The compliance obligations also differ according to company structure. For sole Traders, they have few regulatory requirements while limited companies have a more complex compliance system compared to other firms of businesses like the partnership and LLPs.

Credibility and Public Perception

The choice of business structure has a great influence on how clients, suppliers and investors see your business. Limited companies enjoy the most forms of credibility due to the formal structure and regulatory guidelines. For sole Traders, there needs to be a lot of work done to establish trust and credibility in the business market.

Exit Strategy

As a business owner, you should always consider your exit strategy. For sole Traders, it may be difficult to transfer ownership or sell the business. Limited companies offer the best option if you want to exit your business, you just have to transfer the shares and ownership of the business to another individual or entity. For partnerships, you can just transfer the partner's ownership to a new partner.

Below are different types of business structures that are available to non-residents in the UK:

Sole Trader

A sole trader is also called a sole proprietorship. It is typically the smokers business structure available for non residents in the UK, in which the individual owns and operates their business alone. This business structure is mostly known among freelancer, and small business owners due to the simplified setup process and minimal compliance requirements.

Key Attributes of a Sole Trader

Ownership and control: the ownership and control of the business is solely by the sole trader as they have full control and decision making power which allows them to make fast business decisions.

Liability: In the sole proprietorship, there is no clear separation between the owner and the business. This means the sole trader is responsible for all unlimited liability in case of avg debt or financial obligations on the business. If the business faces any form of financial difficulties, the assets of the sole trader are at risk.

Taxation: Every profit the business generates is considered the sole trader's personal income. The sole trader has few tax obligations which includes filing for annual Self-Assessment tax returns, paying Income Tax and the National Insurance Contributions paid on the profits.

Registration: With a no complex registration process, the sole trader must ensure to register with HMRC as send employed. Unlike other forms of business structure, for a sole trader, you only have to register with HMRC.

Advantages

Easy to establish: some proprietorship has a simplified setup process with lesser legal formalities and costs compared to other firms of businesses.

Total control: the sole trader has full control and decision making power over every operation of the business allowing them to make fast decisions regarding the business.

Profit retention: every profit gotten from the business is retained by the sole trader offering a direct financial reward for their efforts into the business.

Privacy: there is complete privacy for a sole trader. Unlike limited companies, they are not required to provide all personal details to public records.

Flexibility: sole traders easily adapt to business environments offering them the chance to be able to change their business practices so it fits the environment more.

Less compliance requirements: there are less regulatory obligations of a sole trader reducing the burden of compliance and any associated costs.

Disadvantages

Unlimited liability: On a sole proprietorship, the owner is responsible for every debt and liabilities of the business putting their personal assets at risk if the business encounters agt form of financial trouble.

Tax efficiency: as long as the profits of the business increases, the tax of a sole trader increases. Which might become less tax efficient compared to limited companies who offer a more favourable tax option.

Perception and credibility: clients or suppliers do not seem to see some traders as well established and credible business ventures compared to that of limited companies and this may affect the overall growth of the company.

Capital raising: for some traders, shares cannot be issued to others and there are limitations to certain types of funding if they want to acquire external funding.

Continuity: the existence of the business solely depends on the owner, in the case of an illness, incapacity or death, the business may struggle to survive.

Workload and responsibilities: a sole trader bears the whole burden and responsibilities of building, operating and managing the business without support which might become a challenge especially when the business is growing at a rapid rate.

Sole proprietorship offers total control over the business with a simplified startup and operation system, making it a good choice for entrepreneurs who want to start a small business or for freelancers. However, you should always take into consideration the associated risk with running this type of business structure.

Partnerships

In a case where more than one individual wants to start up a business while having control and decision making power over the business, the best option is a partnership. This type of business structure is more common in the UK among professionals such as solicitors, doctors, accountants and several trading businesses.

Types of Partnerships in the UK

General Partnership: According to the Partnership Act 1890, a general partnership is a business involving two or more individuals who have equal responsibility for the business's operations and debts. Each partner has full rights to actively participate in the operation and management of the business and is responsible for any business liability or obligations.

Limited Partnership (LP): This was established under the Limited Partnerships Act 1907, stating that an LP consists of not less than one general partner and one of more limited partners whose liability is restricted to their specific investment in the partnership. Limited partners do not engage in operation and management of the business.

Personal Liability Considerations

General Partnership: all partners are personally liable for the debts and obligations of the partnership, putting their personal assets at risk.

Limited Partnerships: general partners have unlimited liability while limited partners have liability that are restricted to their contributions to the partnership.

Taxing and Legal Liabilities:

For general and limited partnerships, the partnership is transparent for tax purposes which means that the business is not taxed but each partner pays tax from their income acquired from the profits of the partnership.

Establishing a Partnership

1. Choose a unique business name that complies with the legal requirements
2. Draft a partnership agreement. A partnership agreement is a document like a constitution that contains responsibilities of each partner, partners rights, profit sharing ratios, procedures for managing disputes and also how to effectively manage the partnership. Although this is not legally mandatory, it is necessary to guide the partnership.
3. Register with HMRC. All partners must register themselves with HMRC to file reports of their income and pay taxes. (Only the LLC is registered at Companies House).

Advantages of Partnerships

Combined expertise of both partners enhancing business performance.

Shares responsibilities; workload and decision making power between partners.

Flexibility; business can adapt faster to changes in the environment.

Disadvantages of Partnerships

Unlimited liability (general partnership): personal assets of the partner are at risk if the business falls into debt.

Potential for disputes: varying opinions among partners might lead to a potential conflict.

Continuity concerns: unless stated otherwise in the Partnership Agreement, the partnership may dissolve upon the departure or death of a partner.

Considering liability, taxation, preferences and long term business goals is essential to choose the right form of partnership. You can also consult a professional or advisor.

Limited Liability Partnership (LLP)

A limited liability partnership (LLP) is a business structure in the UK that joins the operational flexibility of a partnership and the limited liability of a limited company. This business structure, especially the limited liability, makes it a choice for professionals such as accountants, solicitors and consultants who would want to collaborate with their colleagues while still maintaining full control over their assets.

Key Attributes of an LLP

Separate legal entity: An LLP is a form of partnership that is known due its separate legal with from the members. The financial responsibility of every partner is restricted to their investment in the LLP and aht personal contributions that may have been provided.

Flexibility: the management and profit distribution is flexible of an LLP. Partners can choose the internal structure of the business as well as the profit-sharing ratios of the business.

Taxation: In cases of taxes, an LLP is considered similar to a traditional partnership. The business itself is not taxed but the partners pay tax from profits received from the business. This type of taxation helps in avoiding multiple taxation that occurs sometimes in limited companies.

Registration Process

The following are steps to establish an LLP in the UK:

1. Choose a business name: your business name must be unique and complex with all the naming requirements of Companies House.
2. Partnership members: An LLP just has at least two designated members at the time of incorporation who are responsible for regulatory compliance such as filing annual accounts.
3. Registered Office: the partners must provide a physical UK address where all official mails and official inspection of the business will be carried out.
4. LLP Agreement: Although this is not legally mandatory, it is important to draft an LLP Agreement. The agreement contains the rights and responsibilities of each partner , how the profits will be shared and procedures for conflict resolutions.
5. Submit incorporation documents: once you have gotten all these documents, you have to complete and fill the LLP incorporation form (LL IN01) to Companies House which can be done either online or by post. The online registration at Companies House is typically processed faster compared to that of postal applicants.

Obligations

Once you have successfully established your LLP, you have to comply with the following ongoing obligations:

Annual Accounts: annual accounts are prepared and filed with companies' houses. This document provides a transparent view of the financial position of the LLP.

Confirmation Statement: containing all information about the LLP including the partner's information. It is to be submitted annually with Companies House.

Tax Filings: Every partner must file a self assessment tax return, reposting their share of the LLP's profits.

Advantages of an LLP

Limited liability: personal assets of each partner is protected, minimizing financial risks.

Flexibility in management: LLP's gives partners the opportunity to define their management structure as well as the profits sharing arrangements.

Tax transparency: the business is not taxed rather the profit is taxed at the income level of each partner.

Disadvantages of an LLP

Public disclosure: like the limited companies, LLP's are required to file annual accounts and confirmation statements with Companies House, making some of their details publicly available.

Minimum Membership: at least 2 members is acceptable in an LLP business structure.

Limited to profit making ventures: this business structure is not suitable for non profit organizations since it's main aim is profit making

LLP offers a combination between the traditional partnerships and limited liability making it a good option for non residents who want to start a business with other persons. However, you should contact a professional or business consultant to determine which structure fits your business more.

Limited Companies

A minute company is a business structure that is a separate legal entity from its owners, directors and managers should protect the personal assets of these individuals.

Advantages of a Limited Company

Limited Liability Protection: the personal assets of the shareholders are protected and they are only liable for the percentage of shares they own in the company in case of debts.

Tax efficiency: limited companies have the most efficient taxing system which includes reduced personal liability, potential tax planning opportunities or tax reliefs.

Professional status: this type of business structure enhances credibility since it's structure seems very professional. This credibility and professionalism attract investors since they find it as a low risk business structure.

Separate legal identity: a limited company can purchase and own shares, enter contracts, and die or be sued in its own company name. This offered a clear separation between the shareholders personal affairs and that of the business.

Disadvantages of a Limited Company

Administrative responsibilities: a limited company has more complex administrative responsibilities and obligations which includes maintaining statutory registers, filing annual returns and reporting confirmation statements.

Public disclosure: personal details of every director and shareholder of the company is available on Companies House public register making it difficult for the members of this business to maintain privacy.

Formation and Maintenance cost: incorporating and running a limited company can be more expensive considering the registration fee and other compliance costs.

Complex accounting requirements: limited companies have a more strict and complex accounting system and standard which requires a close attention to financial records and reports.

Forming a Limited Company

1. Select a company name that is unique and follows every requirement for naming companies by Companies House.
2. Appoint directors and shareholders of the company. The directors are responsible for decision making power of the company while the shareholders have ownership over the company.
3. Draft out your articles of association and memorandum of association. You can use the Companies House article of association as a guide in creating one for your company.
4. Designate a registered office address which will be the official physical location of your company to receive nails and other important documents from relevant authorities.
5. Register with Companies House by submitting necessary information and documents such as details of directors and shareholders, registered office address, articles of association and memorandum of association.
6. Register for corporation tax with HMRC informing them about the incorporation of the company and this must be done within the first three months of incorporating your company.

Company Limited by Guarantee

A company limited by guarantee Is a form of business structure which is more suitable for non profit organizations in the UK which includes charities, clubs and associations. This business structure offers a separate legal entity from its members, giving the limited liability protection and the ability to sign contracts, purchase and own assets and employ staff with the company's name.

Key Attributes of a Company Limited by Guarantee

Limited liability: the members of these companies,known as guarantors, agreed to contribute a specific predetermined nominal amount which is often £1 towards the company's debts in the case of dissolution limiting their personal financial risk.

Non profit distribution: unlike companies limited by shares, CLG does not share its profits to its members, rather any extra funds are reinvested back into the organization.

Separate legal entity: the company acts as an independent legal entity allowing it to purchase and own assets, go into contracts and be held liable separate from its members.

Advantages of CLG

Enhanced credibility and trust: the formal nature and legal compliance of this business structure enhances it's credibility among stakeholders, donors and partners which is important to organizations seeking funding or public support.

Tax benefits: registered charity organizations operating as CLGs may be eligible for several tax relief and exemptions including reliefs from corporation tax as long as they meet the criteria.

Continuity: the continuity of CLG is not affected by a change in membership as the organization continues to function even with new members.

Disadvantages

Regulatory Compliance: CLG must comply with every company law and if registered as a charity, they must also abide by charity law. The dual compliance needs a thorough record keeping and regular account filing and returns which can be hectic, time consuming and require lots of administrative resources.

Restrictions on profit distribution: members cannot share or receive profits which may limit the ability of investor interest who sees financial returns.

Administrative responsibilities: the frequent need to always maintain statutory records, hold regular official meetings, and adhere to all reporting obligations can be an additional administrative burden on the organization.

Forming a Company Limited by Guarantee

To incorporate a company limited by guarantee in the UK, the following steps are necessary:

1. Select a company name that is unique and follows all the naming requirements by Companies House.
2. Prepare essential governing documents such as the memorandum of association which is signed by initial guarantors signifying they agree to form the company and the articles of association which contains the company's structure, roles or every officer and governance procedures.
3. Appoint directors which will help in managing the organization and must not be less than one and guarantors which are the sole contributors to the organization. The same individual can be a director and also a guarantor.
4. Register your company with Companies House by providing all the necessary documentation and necessary fees.
5. Obtain necessary licenses or registration which all depends on the activities of the organization. Charity registration with the Charity Commission may be required.

A competition limited by guarantee offers a business structure for non residents who would want to start up a non profit organization in the UK. This structure provides a separate legal entity, potential for tax advantage and a limited liability.

Changing Your Business Structure

Changing your business structure in the UK is a decision that can affect your legal obligations, tax liabilities, and overall business operations. Before deciding this, you should perform a thorough research on the business structure you want to start.

Factors to Consider Before Changing Your Business Structure

Business Goals: access the overall growth of your business to determine if your current business structure aligns with your business's long term goals.

Legal obligations: different business structures have different legal obligations. Changing your business structure to a limited company implies that you must adhere to the Companies Act 2006, which includes filing accounts and maintaining company statutory records.

Tax implications: choosing a different bush structure can affect your tax obligations. For instance, as a sole trader who wants to transition into a limited company should consider that they must pay corporation tax once they transition. They should put into consideration the recent corporation tax increase to 25%.

Liability and risk: limited companies offer limited liability protection, keeping personal assets of the owners from business debts. This is important for companies in risky industries.

Steps to Change Your Business Structure

1. Consult a UK business professional to determine the advantages and risk of changing to a particular business structure.
2. Notify HMRC of your decision to change your business structure and update your tax obligations which may involve registering for VAT, PAYE, and corporation tax under a new business structure.
3. Register with Companies House: if you are transitioning to a limited company or LLP , you must register with Companies House. This registration includes submitting necessary documents like the memorandum and articles of association.
4. Update contracts and agreements with suppliers, customers and employees to reflect the new business structure.
5. Inform stakeholders of your business on the intent to change your business structure. These stakeholders include banks, insurers and licensing authorities to ensure continuity and compliance.

Future Considerations

• Continuously review your business structure to share that it aligns with your long term goals and regulatory environment and requirements.
• Stay informed on legislative changes that could directly or indirectly affect your business.
• Always make sure to fulfill all legal obligations of your new business structure.

Conclusion

Selecting a business structure as a non-resident in the UK is a very difficult decision that needs to be taken with care. Every business structure has its own unique features and legal obligations and this should be put into consideration when choosing a structure.

• For freelancers or small business owners who prefer business structures with less workload, they can choose to operate a sole trader.
• For business owners who would want to scale their business in the market rapidly, a limited company is advisable.
• For Business owners, entrepreneurs or professionals who would want to collaborate with other individuals to start up a business, a partnership is beneficial.
• Lastly for those non residents who would love to start up a non profit organization, a company limited by guarantee is the best option.