Starting a software development company in the UK is an exciting venture, offering numerous opportunities in one of the world’s leading tech hubs. The UK provides a robust legal and business framework, a thriving tech ecosystem, and access to a vast pool of talent, making it an ideal location for establishing a tech-based business.
This guide will walk you through the primary business structures in the UK, helping you determine which is best suited for your software development enterprise. We will explore the features, benefits, and legal obligations of sole proprietorships, ordinary partnerships, limited liability partnerships (LLPs), and companies, providing you with the knowledge needed to make an informed decision.
By the end of this guide, you will have a clear understanding of the steps involved in registering your software development company, ensuring you can focus on what you do best—innovating and developing cutting-edge software solutions.
Four principal business structures in the UK
Sole proprietorship
Most popular business structure. One natural person carries one business on its account. Can employee employers. This business structure is not incorporated. He does not carry on business with partners. Incorporation is an act of becoming a legal person. There is no separation between his personal assets and the assets of his business. The sole proprietor owns all the profit that his business generates. He is personally liable for the debts of his business.
Formalities:
- Registered as self-employed to ‘His Majesty’s Revenue and Customs’ which is a non-ministerial department of the UK government responsible for the collection of taxes.
- Not subject to the Companies Act 2006.
- Does not need to file accounts at the Companies House, the UK registers for companies.
Finance:
- It is more difficult to get a loan as a sole proprietor than in a Limited Liability Partnership.
- Cannot share sales to the market in compassion to the companies.
Liability:
- Personal and unlimited. If the debt cannot be paid, he can be declared bankrupt.
Ordinary partnership
A partnership is formed by two or more people carrying on business together and not registering as a company. There are three types, but two will be examined and limited partnership (Limited Partnership Act 1907) will not be reviewed.
The ordinary partnership is governed by the Partnership Act 1890. It is the oldest and a basic model. Defined by the Partnership Act 1890 as relations that subsist between the persons carrying on business in common with a view to profit. Natural and legal persons can be members of the ordinary partnership. Business means any trade, profession and occupation.
Normally the relations between the partners are governed by the written agreement concluded by them. The Partnership Act of 1890 provides for rules which apply where there is no written agreement (default rules). All the partners are entitled to share equally the firm’s profits and must contribute equally to the firm.
Every partner can take part in the management. No new partner can be admitted to the partnership without the expressed consent of the other partner. The agreement between the partners can only be altered with the expressed concern of all the partners. The majority of the partners cannot expel the partner unless the expressed power to do so has been agreed upon by all the partners = Principle of unanimity. It is not considered as a legal person.
Section 5 of 18 of the PA regulates the relationship between the partners and the third parties.
To what extent can a partner contractually bind the other partners in relation to third parties?
Yes, it can. Section 5 of the PA 1890 provides that every partner is an agent of the firm and his other partners for the business of the partnership. If a partner acts within his authority, he can contractually bind the firm and the other partners. Each partner is jointly liable for the debts and obligations of the partnership and other partners are contractually liable.
Can the other partners of the firm be liable for the acts and omissions which caused the third-party loss?
Liability for tortuous acts. Section 10 of the PA 1890 provides that the partnership and each partner is vicariously liable for the acts and omission of another partner providing that the partner has acted within his authority and the act or omission was done in the ordinary course of business of a firm.
The liability will be joint and several, meaning he can demand compensation for the loss (full amount) from every partner.
Limited liability partnership
A partnership is formed by two or more people carrying on business together and not registering as a company. It is governed by the LLP Act 2000. It is a hybrid organization which combines the characteristics of partnerships and companies. The liability of partners is limited. Large professional firms lobbied for this act. LLP is incorporated. Incorporated business structures are called bodies corporate.
The LLP Act refers to the partners as members. The members of the LLP have limited liability. They are registered at the Companies House. Generally, they are governed by the company law, however the partnership law may apply. Partnership law- internal relations, company law – external relations. There are no mandatory general meetings, LLP does not have to file accounts as companies do etc. The principal difference to a company is the limited liability of its members who are not personally liable for the debt of the firm.
Company
Companies Act 2006 provides for different forms of a company. There may be public or private companies. The liability can be limited or unlimited. Only private companies can have unlimited liability, public companies have only limited liability. Public companies must have a share capital. Private companies need not, although a vast majority of companies have a share capital. Companies which do not have a share capital are called companies ‘limited by guarantee’.
Public v Private
Public companies can share their shares to the public and private companies cannot sell their shares to the public at large. Only public companies can be listed on the stock exchange and raise funds. Private companies cannot do that.
Securities include shares and bonds (equity and debt). The company can issue shares and then there will be a capital increase.
Bondholders are creditors who are not members of the company. They have the financial interest and have the right to get back the principal amount of the debt plus interest. The investment in bonds is more secure because if the company goes bankrupt the shareholders will be the first to pay. You will still get your interest despite the company making or not making a profit.
There is a difference between listing securities on the stock exchange and offering securities to the public. It is very difficult to sell the shares which are offered to the public. You should find another person who can purchase your stock. No minimal capital requirement for private companies. For public companies, the minimum capital is 50,000 pounds. Both private and public companies can be created by one person. Public companies must have two directors. Directors can be shareholders but do not have to do it. There are strong incentives that director should be a shareholder.
Public companies are required by law to appoint a company secretary whereas private companies are not. A company secretary is a person who ensures that the company complies with its regulations and forms the members of their legal responsibilities. Responsibility for compliance ensures that dividends are paid etc.
If a company is private, we use Ltd. If the company is public, we use Plc.
Limited and unlimited refers to the liability of the members.
The vast majority of companies are limited. Unlimited companies have less regulation, and they don’t need to file accounts to the Company House and there is more privacy.
Shareholders are members of the company and have financial rights, voting etc.
Listed and quoted companies
What is the difference? A quoted company is a company whose share capital has been included on the official list (a market with strong regulation) whose share capital is officially listed in the European Economic Area states or whose share capital is admitted to dealing on the NY Stock Exchange or Nasdaq. To be listed is to be on the official list. For example, Facebook is on the Nasdaq. It’s quoted and not listed.
Conclusion
Starting a software development company in the UK offers numerous advantages due to its thriving tech ecosystem and supportive business environment. Choosing the right business structure is crucial for success. Sole proprietorships offer simplicity but carry unlimited personal liability. Ordinary partnerships allow shared responsibility and joint decision-making but also joint liability. Limited Liability Partnerships (LLPs) provide limited liability protection and a flexible structure, while companies, whether private or public, offer limited liability and greater access to capital but come with more regulatory requirements.
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