What’s the Best Legal Structure: Incorporated or Unincorporated?
One of your first decisions when starting a business will be to determine which legal structure to use and how this structure may affect the way the business operates.
Several key factors will influence this decision, such as tax implications, the extent of your personal liability (should the business fail), the amount of administrative work involved, and even your ability to raise finance.
Businesses can be run as incorporated entities (generally, as a limited company) or as unincorporated entities (usually, going self-employed, or setting up a partnership). But which is best for your specific business requirements?
What is an Incorporated Business?
Business incorporation establishes your company as a separate legal entity. You are still the owner, but by using this legal structure, you can gain clear financial and tax advantages for your company. When you incorporate your business, you select one of several legal structures to operate under, depending on your current and potential future needs, and the nature of your business.
While you can choose an initial structure for your company, it is possible to change it as it grows and matures.
What is an Unincorporated Business?
Unincorporated businesses do not have a separate legal identity from their owners which means that the owners are legally responsible for the activities of the business. They are personally liable for any losses or debts incurred by the company and share the risks, costs, benefits, and responsibilities that come with running a business. Each partner is also responsible or liable for the other partner’s negligence or misconduct. A partnership’s profits and losses are split among the partners. This will be in accordance with the agreed-upon profit-sharing ratio, with each partner paying tax on their share of the profits.
Incorporated or Unincorporated?
Since an incorporated business becomes a separate entity from the owner, it can stand alone in the courts. If you run an unincorporated business, you, the business owner, bear all the responsibility and liability for everything your business does. The biggest difference between an incorporated and an unincorporated business is the way the owners are held responsible for the actions and results of the organisation.
- An incorporated business is a legal entity that exists independently from its owners (shareholders). It has the ability to sue and be sued on its own. In contrast, an unincorporated business is legally the same as the person who runs it.
- If an incorporated business can’t pay its debts, it can be placed into liquidation and any assets it owns can be sold off. This includes things like vehicles and other equipment. If an unincorporated business can’t pay its debts, the business owner can be made bankrupt, and all its assets are potentially available to satisfy the business debts. This can include their home and any other personal property or assets.
- Another common reason for choosing the incorporated route is status. Many people believe that running a business as a limited company gives it a higher professional status – making your business appear larger, or more substantial. Some customers will only accept limited companies as suppliers, particularly where you are providing consultancy and other professional services.
- There’s a heavier administrative workload for incorporated businesses when compared to unincorporated businesses. For example, limited companies need to file a confirmation statement with Companies House each year, as well as the annual accounts.
Fully understanding the differences between owning and operating an incorporated business and an unincorporated one can help you to determine which model is right for you. If the risk is a concern for you, then incorporating can help give you peace of mind and ensure that your own personal wealth and assets are kept safe from any liability your business incurs.
Get in Touch to Discuss Your Legal Structure
We’d always suggest seeking professional advice before settling on a business structure for your new enterprise. Although you can change the structure later, it’s worth spending the time to get it right initially, giving yourself the best foundations for the early stages of your business. Contacting us is easy, our experience and know-how mean we can tailor our business accounting services to suit the individual needs of your business, as we know there is no one-size-fits-all approach. Talk to our team of expert accounting consultants in Hampshire to see how Hysons, Chartered Accountants, can help your business.