Organisational Structures and Registering with HMRC
If you have an idea or a project, it may be sensible to set up a business through which you can deliver it. Particularly if you want to use a premises, or will receive funding, the people you are working with will probably want to enter into contracts, and it can be helpful to have an organisation set up so you can keep everything in one place.
It doesn’t have to be complex, or large, and there are many different forms a business can take – it might not be a “business”. Most people associate that word with making money, and that often isn’t the aim in the cultural and creative sector. But, setting up a business or charitable operation can mean you are able to deliver your project more efficiently, and with less risk to you.
In this guide we’ll talk you through the main legal structures and what impact each choice might have.
There are different structures you can use, depending on the scale of your project, the project’s aim, the amount of administration you can deal with, and whether you have other partners. You might think different elements of the different structures would be best.
The main structures where money is being generated are sole trader, ordinary partnership, private limited company, limited liability partnership (LLP) and community interest company (CIC). If the aim of the organisation is purely for the benefit of the community, you may also consider setting up as a Charity or a Charitable Incorporated Organisation (CIO).
Sole traders are treated by HM Revenue & Customs (HMRC) as self-employed for tax purposes (a vast majority of small organisations run by one or two people are sole traders). If you are a sole trader, you keep all your business profits (after you have paid the relevant tax) but are also personally liable for the debts of your business. This means that your home and other personal assets may be at risk if you can’t pay your business’s debts.
Sole traders must register with HMRC for tax self-assessment as a self-employed person. They must also complete an annual self-assessment return, and pay income tax and National Insurance contributions.
Why/why not a sole trader?
- Low cost, easy to set-up.
- Full control retained.
- Full liability for debt.
- No separate legal entity – it is you that is sued and responsible for debt.
An ordinary partnership, or simply a ‘partnership’, is two or more people who “conduct business with a view to making profit”. Businesses or organisations that will be owned by two or more sole traders often use this structure. You don’t need to register this type of partnership with Companies House.
You and your partners have unlimited liability for the debts of your business. You can each be held responsible for transactions or contracts entered into by any of your other partners.
Partners are treated by HMRC as self-employed for tax purposes in the same way as sole traders, and keep and share all their profits (after you have paid the relevant tax). Partners do not all have to be individuals, as a private limited company is treated in law as a ‘legal person’ that can also enter into a partnership.
If you decide to go into a partnership, it is best practice to ask a solicitor to draw up a partnership agreement before starting to trade. The partnership agreement clarifies each partner’s legal position and provides a framework for dealing with any problems that may arise.
Why/why not a partnership?
- A partnership is generally easier to form, manage and run.
- More potential to raise finance.
- Full liability, affecting all partners.
- partnership disagreements.
- No separate legal entity – partners jointly and severally liable.
Private limited company
A private limited company has a separate legal identity to that of its owners. This means that you and the other owners of the company, who are called ‘members’, benefit from “limited liability”. This means that if something goes wrong and the company needs to pay debts, your personal stake in what needs to be paid back is limited to the amount of money you put in originally (normally a very small amount). Your company itself can own property and other assets.
A private limited company must be set up through Companies House (the online register and regulator of UK companies) and registered with HMRC. It can be “limited by shares”, which means that your liability and that of other members is limited to the money you have each invested buying shares in the company.
It can also be “limited by guarantee”. This means that your liability is limited to the amount you have agreed to contribute to your company’s assets if you wind up your company.
Why/why not a private limited company?
- Less personal financial exposure.
- Limited liability protection.
- The company is a person in the eyes of the law, so it is the company that enters into contracts and it will usually be the company that is taken to court. Of course, the directors are responsible for managing the company – and there are instances where personal liability arises – but provided those running the company have taken the time to understand what their responsibilities are, and carried those responsibilities out, they will not be held liable when things go wrong.
- Involves set up costs.
- Annual accounts and financial reports must be placed in public domain.
Limited liability partnership
A limited liability partnership (LLP) is a legal structure that lets you set up in business with one or more partners while limiting your personal liability (as with a limited liability company). An LLP is also similar to a private limited company in that it has a separate legal identity to that of the partners (who are known as ‘members’).
In many ways, LLPs operate in exactly the same way as ordinary partnerships. However, you must register LLPs with Companies House.
Members of an LLP can be either individuals or limited companies (known as ‘corporate members’). Individual members will usually be treated as being self-employed for tax purposes, and must be registered for self-assessment with HMRC. You and other members act as agents for the LLP and can form binding contracts on its behalf.
Each LLP must have at least two ‘designated members’ who are responsible for various administrative duties such as dealing with accounts and tax matters on behalf of the partnership.
Since the LLP has a separate legal identity to its members, legal claims against your business can only be made against the LLP itself and not you as a member. Your personal assets also cannot be seized to settle the partnership’s debts.
Management of the partnership is usually shared among the members, as specified by an LLP agreement. This is a contract between the members of the LLP, which sets out members’ rights and obligations. It also provides a plan for how you will run the partnership. It is best practice to ask a solicitor to draw an LLP agreement before starting to trade.
Why/why not an LLP?
- Flexibility: can be incorporated in members’ agreement.
- Advantages of limited company and partnership combined.
- Partners must disclose income.
- LLP must start to trade within a year of registration.
Community interest company
A community interest company (CIC) is a specific type of limited company that runs commercially as a social enterprise and has clear social objectives, such as providing employment opportunities for people with disabilities.
CICs must be registered with the Office of the Regulator of Community Interest Companies and pass a ‘community interest test’ before being approved. This test ensures that activities of a CIC provide benefits to the community.
You can set up new CICs as private companies limited by shares, or as private companies limited by guarantee.
CICs that are limited by shares and that make a profit can distribute some of their profits to shareholders, subject to certain conditions. There are restrictions on the distribution of profits to shareholders to ensure that CICs use their assets and profits for the benefit of the communities they serve.
Why/why not a CIC?
- A clear commitment to social goals.
- Access to certain forms of finance.
- Limited liability and protection.
- Ongoing administrative burden.
- Not all charitable funding is available.
- Difficult to change from a CIC to another structure
A Charity is an organisation set up to provide a specified community benefit. It must have “charitable purposes” and is run by a board of “trustees”.
Charities can be unincorporated or incorporated. An unincorporated charity is a simple way for a group of volunteers to join together for a community purpose. However, an unincorporated charity can’t enter into contracts and the trustees are personally liable for losses (similar to a sole trader).
An incorporated charity can either be a Charitable Company or a CIO. They are registered with the Charities Commission and have similar obligations to a private company.
It is increasingly common for organisations with charitable aims to set up as a Charity and then realise they have a product or service they can sell and generate money to help the charity. As a Charity you can’t just go out and make profit, you need to set up what’s often called a “trading arm”. This is where the charity sets up a separate company (using one of the structures above) and any trading they do to generate money is done by that company.
A great example is charity shops. These are operated as commercial operations, and then the money they generate is gifted to the charity itself. To the public they are one and the same brand, and the public know that if they spend their money in the Oxfam shop, for example, they are supporting the Oxfam charity.
It is the same with organisations that run cafes or shops in their venues. If you think you would like to be a charity, because of the values and benefits, but you also know you will need to make money as well, it is quite an easy process to ensure you are set up properly.
Who is in charge?
When you set up a new business, depending on the structure, you may be able to run the organisation yourself, or you may need to bring in directors, members, trustees etc. to assist. In some organisations there are a set number required, in others, you can just have 1 (yourself).
When deciding how to set up, you should think about whether you want to have more people involved, or whether you need help. Leadership can be a good way to bring experts on board.
A charity can be a useful format if you want to apply for certain funding, and you have a real desire to set something up which helps and benefits your community. There are different pressures when running a charity though (mainly ensuring you are able to stick to the aims of the charity), so it isn’t a structure to just jump into.
Hints and tips
- Solicitors and accountants can help you make decisions about legal structure, as well as helping with the practical procedures involved in setting up more complex structures such as LLPs and private limited companies.
- As your business grows, you might need to review your structure to meet changing business needs.
- It is possible to change the legal structure, but this may cause problems by disrupting business activities, and it can be costly and time-consuming.
Every project is different, so it is not always the case that you can simply copy what somebody else has chosen to do. However, take a look at some of these organisations who have turned their creative passions into successful operations:
Are you reading this page as part of our Guide for Opening, Running and Growing a Cultural or Community Space? Have a look at Key Contacts next.
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