In today's economic climate, with businesses struggling and rising living costs hitting every level of the supply chain, uncertainty is something most businesses are living with every day. For businesses operating without any formal structure of governance in place, those challenges tend to be even more acute.
This article is aimed at sole traders, small business owners, and individuals who are looking to establish, formalise, or restructure their business arrangements - whether that means incorporating for the first time, entering into a collaborative venture, or putting proper governance documentation in place. We will look at the main structural options available to businesses and provides a practical overview of the key documents associated with each one.
Important note: Before taking any of the steps discussed below, please make sure you get independent legal and accounting advice. The legal and tax implications will vary significantly depending on your specific circumstances.
Sole trader considerations
Q: I run a sole trader business in the construction materials sector with no written contracts in place. What other structures should I be thinking about?
A good starting point is to sit down with a solicitor who can get to grips with how your business operates and help you formalise those unwritten arrangements with customers and suppliers in a way that properly protects your interests.
For further information on running a sole trader business, see: https://www.gov.uk/set-up-sole-trader
If you're not already operating through a limited company, incorporation is well worth considering. A company limited by shares is the most common structure for individuals looking to trade for profit with the benefit of limited liability. Registered at Companies House, the company exists as a separate legal entity from its shareholders, meaning your personal exposure is limited to the capital you've put in - keeping personal assets like your family home separate from the business. A company can also employ staff, hold property, and enter into contracts in its own name.
For further information on incorporating a limited company, see: https://www.gov.uk/limited-company-formation
Collaborative business structures
Q: My business is going well and I'm looking to collaborate with others to help it grow. What are my options?
There are three main structures used for collaborative arrangements: a straightforward contractual joint venture; a company limited by shares with multiple shareholders, and a limited liability partnership (LLP). A solicitor can help you work through which is most appropriate for your situation.
Simple contract structure
The simplest option is for parties to work together as independent contractors under a contract, without forming a company or LLP. The contract sets out everyone's commitments, the scope of the venture, how property and rights are used, the duration of the arrangement, and the exit strategy.
- Advantages: Each party keeps control of their own assets; fewer administrative obligations, simpler to set up and wind down.
- Disadvantages: No separate legal entity and no limitation of liability; can be a drawback when seeking investment or planning a sale; transferring an interest is more complicated than selling shares.
Limited Liability Partnership (LLP)
An LLP combines limited liability with the flexibility and tax transparency of a partnership. Like a company, it's a separate legal entity that can sign contracts, hold property, and employ staff. All members have the right to participate in management, and the relationship between them is governed by a private LLP agreement covering profit-sharing, management responsibilities, decision-making, and how members join and leave.
LLPs tend to work best for businesses that would naturally operate as partnerships; professional services firms, medical practices, and similar.
For further information on setting up an LLP, see: https://www.gov.uk/set-up-a-limited-liability-partnership. The Limited Liability Partnerships Act 2000 is available at: https://www.legislation.gov.uk/ukpga/2000/12/contents
Profit extraction mechanisms
Q: How do we get money out of the business?
In a simple contract structure, profits generally stay with each contracting party rather than being shared centrally - though the contract must document this clearly.
For company shareholders, there are two main routes: selling shares to a third party (although there's no guaranteed market for shares in a private company), or receiving dividends from distributable profits. Importantly, the company must meet its debts and statutory obligations before returning anything to shareholders, and directors may choose to retain profits in the business if they consider that to be in the company's best interests.
For further information on taking money out of a limited company, see: https://www.gov.uk/running-a-limited-company/taking-money-out-of-a-limited-company
For LLP members, profits are distributed in line with the profit-sharing terms set out in the LLP agreement. Exiting the business is typically more complex than selling shares - the LLP usually buys back the departing member's interest at an agreed value, often through staged payments to protect the ongoing business.
Articles of Association and Shareholders' Agreements
Q: What are Articles of Association and Shareholders' Agreements?
Think of the articles of association (the Articles) as your company's rulebook - setting out the rights and powers of directors and shareholders. Every company incorporated in England and Wales must have articles of association, and they're publicly available at Companies House. Standard Model Articles can be adopted on incorporation, but these are fairly basic and won't give adequate protection for most trading businesses with more than one shareholder. The Articles typically cover director appointment and removal, how meetings are called, and the rights attaching to shares.
The Companies Act 2006 is available at: https://www.legislation.gov.uk/ukpga/2006/46/contents
The Companies (Model Articles) Regulations 2008 can be found at: https://www.legislation.gov.uk/uksi/2008/3229/contents
A shareholders' agreement is a separate, private contract between the shareholders (and often the company). Because it doesn't need to be filed at Companies House, it can include commercially sensitive terms the parties want to keep confidential. It typically covers reserved matters requiring shareholder approval, minority shareholder protections, dividend policy, pre-emption rights on share transfers, and restrictive covenants.
Conclusion
This article provides only a broad overview of the structures and documentation you might encounter - there is much more to consider in practice. Getting the right structure and governance framework in place is fundamental to any business's success, helping to manage risk, protect assets, and limit liability. Independent legal, tax, and accounting advice is essential to figuring out what's right for your situation. Corporate law can feel daunting, but a knowledgeable and approachable solicitor is a great place to start. Our team of Corporate Lawyers at Trowers & Hamlins are here to offer the guidance you need for your business to thrive.
