• the tax and National Insurance that you pay
• the records and accounts that you have to keep
• your financial liability if the business runs into trouble
• the ways your business can raise money
• the way management decisions are made about the business

There are several structures to choose from, depending on your situation. This guide will help you understand the differences between them.

If you are not sure which legal structure would best suit your business, it's a good idea to get advice from an accountant or solicitor.

Self-employment

To be a sole trader, a partner, or a member of a limited liability partnership as an individual rather than a company, you must be self-employed - and registered as such with HM Revenue & Customs (HMRC). This does not mean that you can't also do other work as an employee, but the work you do for your business must be done on a self-employed basis.

If you are not sure whether this work counts as self-employment, ask yourself these questions:

• Do you present your clients with invoices for the work that you do for them?
• Do you carry out work for a number of clients?
• Are you responsible for the losses of your business as well as taking the profits?
• Can you hire other people on your own terms to do the work that you've taken on?
• Do you have control over what work has to be done, how the work has to be done and the time when and place where the work has to be done?
• Have you invested your own money in your business or partnership?
• Do you provide any major items of equipment which are a fundamental requirement of the work you carry out?
• Do you have to correct unsatisfactory work in your own time and at your own expense?

If you can answer "yes" to most of these questions then you are probably self-employed already, and should let HMRC know this immediately if you have not already done so. You may be fined £100 if you fail to register within three months of becoming self-employed. There is no fee for registration.

If you answer "no" to most of the questions above, you will normally be an employee.

Sole trader

Being a sole trader is the simplest way to run a business, and does not involve paying any registration fees. Keeping records and accounts is straightforward, and you get to keep all the profits. But you are personally liable for any debts that your business runs up, which can make this a risky option for businesses that need a lot of investment.

Management and raising finance

• You make all the decisions on how to manage your business.
• You raise money for the business out of your own assets, and/or with loans from banks or other lenders.
  

Records and accounts

• You have to make an annual self assessment tax return to HMRC.
• You must also keep records showing your business income and expenses.
  

Profits

• Any profits go to you.
  

Tax and National Insurance

• As you are self-employed, your profits are taxed as income. You need to pay fixed-rate Class 2 National Insurance contributions
• (NICs) and Class 4 NICs on your profits.
  

Liability

• As a sole trader, you are personally responsible for any debts run up by your business. This means your home or other assets may
• be at risk if your business runs into trouble.
  

Partnership

In a partnership, two or more people share the risks, costs, and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.

Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved but the business may not need to cease.

A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.

Set-up

• Each partner needs to register as self-employed.
• It's a good idea to draw up a written agreement between the partners. For further advice, consult an accountant or solicitor.

Management and raising finance

• Partners themselves usually manage the business, though they can delegate responsibilities to employees.
• Partners raise money for the business out of their own assets, and/or with loans. It's possible to have 'sleeping' partners who contribute money to the business but are not involved in running it.

Records and accounts

• The partnership itself and each individual partner must make annual self-assessment returns to HM Revenue & Customs (HMRC).
• The partnership must keep records showing business income and expenses.

Profits

• Each partner takes a share of the profits.

Tax and National Insurance

• As partners are self-employed, they are taxed on their share of the profits. Each partner needs to pay fixed-rate Class 2 National Insurance contributions (NICs) and Class 4 NICs.

Liability 

• In England, Wales and Northern Ireland, partners are jointly liable for debts owed by the partnership and so are equally responsible for paying off the whole debt. They are not severally liable, which would mean each partner is responsible for paying off the entire debt. Partners in Scotland are both jointly and severally liable
  

Limited liability partnership (LLP)

A limited liability partnership (LLP) is similar to an ordinary partnership - in that a number of individuals or limited companies share in the risks, costs, responsibilities and profits of the business.

The difference is that liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. This means that members have some protection if the business runs into trouble.

Set-up

• There is no restriction on the number of members, but at least two must be designated members - the law places extra responsibilities on them.
• If the LLP reduces in number and there are fewer than two designated members then every member is deemed to be a designated member.
• LLPs must register at Companies House.
• It's a good idea to draw up a written agreement between the members. For further advice, consult an accountant or solicitor.

Management and raising finance

• Usually the members manage the business, but can delegate responsibilities to employees.
• Members raise money out of their own assets, and/or with loans.

Records and accounts

• The LLP itself and each individual member must make annual self-assessment returns to HM Revenue & Customs (HMRC).
• All LLPs must file accounts with Companies House.
• An annual return (form LLP363) will be sent to the members before the anniversary of incorporation each year. It needs to be completed and returned to Companies House with the appropriate fee.

Profits

• Each member takes an equal share of the profits, unless the members agreement specifies otherwise.

Tax and National Insurance

• Members of a partnership are taxed on their share of profits and pay the tax and National Insurance contributions (NICs), according to their business structure.
• An individual will pay income tax and NICs, and a limited company member will pay corporation tax.
• The profits of a member of an LLP is taxable as profits of a trade, profession or vocation and members remain self-employed and subject to Class 2 and 4 NICs.
  

Limited liability companies

Limited companies exist in their own right. This means the company's finances are distinct from the personal finances of their owners.

Shareholders may be individuals or other companies. They are not responsible for the company's debts unless they have given guarantees (of a bank loan, for example). However, they may lose the money they have invested in the company if it fails.

The Companies Act 2006 makes a number of changes that will affect directors and shareholders of limited companies.

Main types

• Private limited companies can have one or more members, eg shareholders. They cannot offer shares to the public.
• Public limited companies (plcs) must have at least two shareholders and can offer shares to the public. A plc must have issued shares to a value of at least £50,000 before it can trade.
• Private unlimited companies - these are rare and usually created for specific reasons. It is recommended you take legal advice before creating one.

Set-up

• Must be registered (incorporated) at Companies House.
• Must have at least one director (two if it's a plc) and a company secretary, who may also be shareholders. In a plc, the company secretary must be professionally qualified. From October 2008, it will no longer be necessary for private limited companies to have a company secretary.

Management and raising finance

• A director or board of directors make the management decisions.
• Finance comes from shareholders, borrowing and retained profits.
• Public limited companies can raise money by selling shares on the stock market, but private limited companies cannot.

Records and accounts

• Accounts are filed with Companies House.
• A "shuttle" annual return (form 363s ) will be sent before the anniversary of incorporation each year. It needs checking, amending and returning to Companies House  with the appropriate fee.
  The directors and secretary are responsible for notifying Companies House  of changes in the structure and management of the business.

Profits

• Profits are usually distributed to shareholders in the form of dividends, apart from profits retained in the business as working capital.
• Distributions to individuals by companies with taxable profits subject to a zero rate of corporation tax carry a minimum of 19 per cent corporation tax.

Tax and National Insurance

• Companies pay corporation tax and must make an annual return to HM Revenue & Customs (HMRC).
• Company directors are employees of the company and must pay Class 1 National Insurance contributions as well as income tax on their salaries.
• If your company or organisation has any taxable income or profits, you must tell HMRC that your company exists and that it is liable to tax.

Liability

• Shareholders are not personally responsible for the company's debts, but directors may be asked to give personal guarantees of loans to the company.
  

Franchises

Buying a franchise is a way of taking advantage of the success of an established business. As the "franchisee", you buy a licence to use the name, products, services, and management support systems of the "franchiser" company. This licence normally covers a particular geographical area and runs for a limited time, after which it should be renewable, if you meet the terms of the franchise agreement.

The way you pay for the franchise may be through an initial fee, ongoing management fees, a percentage of your turnover, purchases of goods from the franchiser, or a combination of these.

A franchise business can take different legal forms - most are sole traders, partnerships or limited companies. Whatever the structure, the franchisee's freedom to manage the business is limited by the terms of the franchise agreement.

• Set-up
  This depends on the business structure that the franchisee chooses for their business - usually a sole trader, partnership or limited company.

Management and raising finance

• Franchise agreements usually set out how the franchised business should be run, although they may allow some flexibility. Franchisers usually provide management help and training to franchisees.
• Normally the franchisee must find the money needed to start up the business, but franchisers may sometimes loan some of this.

Records and accounts

• These depend on the business structure that the franchisee chooses for their business. As well as the usual legal requirements, franchisers often expect franchisees to show them detailed financial records.

Profits

• Franchisees often pay a percentage of their turnover to the franchiser, which brings down the overall profits.

Tax and National Insurance

• These depend on the business structure that the franchisee chooses for their business.

Liability

• These depend on the business structure that the franchisee chooses for their business.
  

Social enterprises

A social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners.

They are businesses distinguished by their social aims. There are many different types of social enterprises, including community development trusts, housing associations, worker-owned co-operatives and leisure centres.

Social enterprises may take a number of different business structures - companies limited by guarantee, companies limited by shares and industrial and provident societies are the most common.

Overview of legal structures

Sole trader
The advantages of being a sole trader include independence, ease of set up and running, and that all the profits go to you.

The disadvantages include a lack of support, unlimited liability and the fact that you are personally responsible for any debts run up by your business.

Partnership
Advantages of being in a partnership include its ease of set up and running, and the range of skills and experience that the partners can bring to the business.

On the other hand, problems can occur when there are disagreements between partners, there is unlimited liability, and, as a partner, you are personally responsible for any debts that the business runs up.

Limited liability partnership (LLP)
LLPs retain the flexibility of a partnership as opposed to the rigid structure of a limited company, and your personal liability is limited. There is no restriction on the number of members, but at least two must be "designated members" - the law places extra responsibilities on them.

However, the formation of an LLP is more complex and costly than that of a partnership and problems can occur when there are disagreements between the members. If the number of partners is reduced, and there are fewer than two designated members, then every member is deemed to be a designated member.

Limited liability company
In a limited liability company your personal financial risk will be restricted to how much you invest in the business and any guarantees you have given in order to obtain financing.

But you should remember that this type of company also brings a range of extra legal duties, including the maintenance of the company's public records, eg filing of accounts.

Franchise
The major advantage of a franchise is that it takes advantage of the success of an established business and support networks.

Its disadvantage is that your freedom to manage the business is limited by the terms of the franchise agreement. Also franchisees often pay a share of their turnover to the franchiser, which brings down overall profits.

Social enterprises
Social enterprises are businesses that trade for a social purpose and represent a diverse and growing range of business activity across the UK.