Each legal structure for businesses has advantages and disadvantages.

Sole trader

Running your business as a sole trader offers the simplest legal structure. You are not required to register with Companies House. Accounts and record keeping is straightforward and any profits you make belong to you. However, it leaves you exposed if something goes wrong. It is generally not suitable for raising capital.

Self-employment means that you:

• are the proprietor of your own business
• have the legal and financial responsibility for its operations

Both sole traders and partners in a partnership are regarded as self-employed. If you're self-employed, you'll need to register with HM Revenue & Customs (HMRC) so that they can set up the right Self Assessment and National Insurance records for you.

For further information, see set up as a sole trader.

Partnerships

Partnerships share the burden of ownership, allowing two or more people to set up in business together. Like a sole trader, a standard (unlimited) partnership does not have a legal identity separate from that of the partners, so it does not have to be registered at Companies House.

Standard partnerships have unlimited liability for the firm's debts. Partners in England, Wales and Northern Ireland are jointly liable for debts owed by the partnership, meaning they have equal responsibility for payment of the whole debt.

However, they are not severally liable, which could make each partner responsible for the entire debt.

For further information, see set up a business partnership.

Limited liability partnership (LLP)

It is also possible to set up as a limited liability partnership (LLP), which can reduce the partners' individual liability risk. LLPs are taxed as partnerships, but have the benefits of being a corporate entity, and members have limited liability. An LLP can enter into contracts and hold property.

Limited company

Limited companies allow you to raise capital, issue shares and limit your risks. However, there are more rules governing the way they are run.

For further information, see set up a limited company.

Social enterprises

Social enterprises are businesses with primarily social and/or environmental objectives whose profits are principally reinvested in the business or in the community. See, choose the right structure for your social enterprise.

Company directors

Directors of limited companies - who are office holders - are usually treated as employees for tax and PAYE (Pay As You Earn) purposes. This will require the company to register with HMRC as an employer.

However, if they are treated primarily as shareholders, they will not be classed as employees and will pay tax on any dividends they are granted from the company's profits.

See legal structures: the basics.

When you originally set up your business, you probably chose a legal structure that was suitable for the business at the time. However, you should regularly review your business structure to ensure it continues to best meet your business's needs.

Reasons to change your business structure

You might wish to change the structure of your business operations to:

• Reduce your personal risk exposure - a sole trader, for example, faces unlimited liability for any business debts. Becoming a limited company will limit liability.
• Raise more capital - cash injections are generally only possible if you offer an investor a piece of the business in return, which may require you to create shares in the business.
• Share the responsibilities and risks of ownership - for example, taking on a partner can reduce the burden and provide you with cover when you're sick or away.
• Plan for retirement or sell your business - certain structures may be more attractive for potential buyers, eg, shares in a business are easily transferable, so ownership may change, but the business continues. Sole proprietorship or partnerships may dissolve on death - ownership of a limited company may be more readily distributed to family members.
• Reward your employees - employee share ownership plans only work within a business structure that allows you to create and distribute shares, ie, a limited company.
• React to changes in your type of business or way of working.

Professional advice

Whatever you decide to do, make sure you obtain professional advice before you change your business structure. See expert financial advice.

It is important to note that some changes to your business will require you to inform Companies House. For more information, see reporting changes to Companies House.

If you change the legal structure of your business, you will have to meet certain legal obligations.

Registering with Companies House

If you are changing your business to become a limited company, limited partnership or limited liability partnership (LLP), you need to send the relevant documentation to Companies House. For more information, see starting a company or partnership.

If your business is already organised in any of these ways, you must notify Companies House of any proposed changes to its legal structure and complete the necessary documentation. Reporting changes to Companies House.

If your business becomes a company or an LLP, you must display your full name outside your place of business and at the registered office. Your registration details also have to be printed on your stationery and on external emails.

If you have a website, you will need to include a range of information, including the registration details, VAT number and geographical location. For more information, see signs, stationery and promotional material.

Registering with HM Revenue & Customs (HMRC)

If you're setting up a business as a sole trader or as a partner in any kind of partnership, you need to register with HMRC so they can set up tax and National Insurance records for you. You'll then need to complete and return a Self Assessment tax return each year. See understanding Self Assessment and your tax return.

If you are setting up a partnership, the partners should nominate one partner to act as the main contact with HMRC and fill in partnership tax returns. The nominated partner should also register the partnership with HMRC.

You can read more about registering with HMRC and getting a tax return in our section on Self Assessment.

Closing your business down

If you close your business, you should let HMRC know. To find out more about closing or selling your business, see selling or closing a business.

If you decide to turn your business into a company, you should let HMRC know, and you will have to pay Corporation Tax on the profits.

If you move assets from one legal entity to another, you may have to pay Capital Gains Tax and Stamp Duty Land Tax.

If your business is already VAT-registered, you need to change your registration details to show it is now a company. How to register for VAT.

Assets, debts, contracts and premises

You need to consider whether the existing assets, debts and contracts can be transferred to the new entity. You may have to draw up a business transfer agreement to do this.

Review the terms of your contracts - they may be freely transferable, or you may need consent from the other parties in the contract.

A solicitor or accountant can advise you on how changes in the legal structure of your business will affect your contracts. You can find a solicitor with the Law Society of Northern Ireland, or find a chartered accountant with Chartered Accountants Ireland.

You can re-register your company to change its legal status from:

• a private company to a public company
• a public company to a private company limited by shares
• a private limited company to an unlimited company
• an unlimited private company to a limited company
• a public company to an unlimited private company

On re-registration, Companies House will issue you with an amended certificate of incorporation. The certificate will include the changed name and status of the company and the date of re-registration.

Re-registration from a private company to a public company

A private company with a share capital can re-register as a public company by passing a special resolution to do so.

You must deliver the application to re-register as a public company to Companies House on form RR01, accompanied by:

• a copy of the special resolution
• a printed copy of the amended Articles of Association
• a copy of the relevant balance sheet
• a copy of the auditor's written statement
• a copy of the auditor's unqualified report
• a statement of the proposed secretary (if the company doesn't currently have one)

Re-registration from a public company to a private company

There are four ways in which a public company can re-register as a private company:

• By passing a special resolution, you must deliver the application to re-register with Companies House on form RR02. This should be accompanied by a copy of the special resolution and a printed copy of the amended Articles of Association.
• Following a court order to reduce capital, you must deliver the application to re-register to Companies House on form RR08, accompanied by a copy of the court order and a printed copy of the amended Articles of Association.
• Following a cancellation of shares, where a cancellation of the shares results in the value of share capital falling below the minimum for a public company, the company must re-register as a private company. You must deliver the application to re-register to Companies House on form RR09, accompanied by a copy of the director's resolution and a printed copy of the amended Articles of Association.
• Following a reduction of capital due to a redenomination of shares, by delivering form RR05 to Companies House with assent from all the members and a printed copy of the amended Articles of Association.

Re-registration from an unlimited company to a private company

An unlimited company may re-register as a private limited company by shares or guarantee by passing a special resolution. You must deliver the application to re-register to Companies House on form RR06, accompanied by a copy of the special resolution and a printed copy of the amended Articles of Association.

Re-registration from a public company to a private unlimited company

A public company may re-register as an unlimited company by delivering form RR07 to Companies House with assent from all the members and a printed copy of the amended Articles of Association.

If you notify the right people at the right time of any change in the legal structure of your business, the changeover from one entity to the other should be relatively easy.

Customers

Depending on your contracts with your customers, you may need their consent to transfer contracts to the new business entity. If you don't get their consent, and the contract requires it, this may constitute a breach of contract or give rise to certain rights, such as rights of termination.

Let them know who they now need to pay. You may need to serve notice on debtors if you change the way the business is structured. Advise customers of this as soon as possible.

Suppliers

Let your service providers and suppliers know of your change in your business's legal status and that they should invoice the new entity after the date of the change. Again, you may have to review your contracts with them.

Banks/finance providers

Talk to your lenders about your planned changes. If you lease, hire, hire purchase, or license assets, eg, company cars, you may be prohibited from transferring these assets without obtaining the consent of the third party.

If you change from an unincorporated to a limited liability structure, eg, from a sole trader to a company or limited liability partnership, your bank will probably want you to open a different bank account. Many sole traders use their personal accounts for business purposes. If you are changing from being a sole trader to another legal structure, your bank may insist on you opening a business bank account. The bank may also require personal guarantees for overdrafts or business loans.

Employees

When buying or selling all or part of a business, employers have certain information and consultation (I&C) responsibilities:

• Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), you must inform and consult with representatives of affected employees about the sale, eg, employees who transfer to the new employer. See responsibilities to employees if you buy or sell a business.
• If you have an I&C agreement in place, you must inform and consult employees or their representatives on, among other things, changes to the workforce. This means that you may have to inform and consult when planning to buy or sell all or part of a business. See inform and consult your employees.

Note that you do not have to inform and consult at the same time under both TUPE and your I&C agreement - you can choose instead to 'opt out' of the agreement and consult under TUPE only.

Your landlord

Review your agreement with your landlord. There may be implications of changing your lease to take account of the new legal entity.

Taxes

If you are transferring assets from a partnership to a limited liability partnership (LLP), you need to apply for an exemption from Stamp Duty Land Tax. See Stamp Duty Land Tax: reliefs and exemptions.

If you don't want to transfer titles, contracts or assets, you need to keep the previous business in existence. This may mean extra costs and extra legal obligations, eg, if you change your business from a company to an LLP, but keep the company going, you will have to file accounts for both.

A solicitor or accountant can advise you on other obligations arising from changes in your business structure. See expert financial advice.

Other considerations

When changing the legal structure of your business, you should assign your insurance, licences, trade marks and patents to the new business entity and register documents with the appropriate authorities.