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Landlord Insider
On the Landlord Insider blog, you’ll find some excellent resources for landlords of all sizes. From the latest landlord news, to professional advice, tips and guides for landlords, there’s something for everyone. Brought to you by the excellent team behind the Landlord Vision property management software.

Choosing the Right Structure for your Property Business

Anyone wishing to run a business in the UK has a wide choice of ways to organise it. Each possible structure has its own advantages and disadvantages. This post gives an overview of the three basic types of business structure that are commonly used.

Sole Trader – “One Man Band”

This is the simplest form of business.

A sole trader owns and runs his or her business directly – he or she is “self-employed”. All the risks and rewards are his directly, and all the decisions about the business are his.

If things go well he or she owns all the profits that have made (after having paid tax on them!). 

However, if things go badly the sole trader is liable for all the debts of the business. We call this “unlimited liability” – if  the sole trader’s business fails, his private property can be taken to pay off the debts of the business. In other words, even his personal wealth outside of his business is at risk.

In summary, there is no real distinction or ‘barrier’ between the individual and his or her “one man band” business.

Partnership

Where  two  or  more  people  own  and  run  a  business  together,  they  are  generally referred to as operating in partnership.

Like  a  sole  trader,  all  the  risks  and  rewards  belong  to  the  partners  –  but  the  crucial  point is that, in an ordinary partnership, EACH partner is JOINTLY liable for ALL of the partnership’s debts.

If  things  go  wrong,  any  money  owed  by  the  partnership business can be recovered from the partners themselves – and if  one  of  them  has  no  money  to  pay,  the  other  partners will have to pay that person’s share of the debts as well. Like the sole trader, a partner’s liability is “unlimited” – even non-business personal wealth is at risk.

Note that the Scottish treatment for partnerships differs from the rest of the UK in some aspects of partnership law (although this makes little difference in terms of partnership taxation).

There are also some more specialised forms of partnership that can restrict a partner’s potential exposure or liability, which we shall cover in more detail below.

Limited Company

A Limited Company is a “legal person”. This means that it exists independently of its owners – its shareholders – and it can make contracts, and be sued for its debts in its own name and on its own behalf. 

Here, the word “Limited” means that the shareholders’ liability is limited to the money they have invested in their shares. If things go wrong then, in the vast majority of cases, the worst that can happen to the shareholders is that they will not get their money back – though as we shall see, this is not always the case.

One of the key consequences of this legal distinction is that a company’s money does not automatically ‘belong’  to the  shareholders  in  the  way  that  it  does  with  one  man  bands and ordinary partnerships, as noted above. Even if you own all of the shares in your own company, its assets – including its cash – are primarily the legal property of the  company.  How  the  company  decides  to  transfer  its  wealth  to  its  owners,  etc.,  is  what we shall look at in more detail, in the coming chapters.

Types of Partnerships

There is really only one kind of sole trader, but there are different kinds of partnership.

The  basic  type  of  partnership  is  defined  by  the  Partnership  Act  1890,  and  involves  “persons carrying on a business in common with a view of profit”.

A partnership is not a separate legal person from its members, and for tax purposes it is “transparent”. In other words, the partnership itself does not pay tax – each partner pays tax on his or her share of the profits.

(In Scotland, a partnership is a legal person, but for tax purposes, it is treated in the same way as an English partnership, and is “transparent” like them). 

In some cases, although two people may agree to share the income from a project, they  are  not  strictly  a  partnership  because  they  are  not  carrying  on  “a  business  in  common”.

In such a case, the activity is commonly referred to as a “joint venture”.

HM Revenue and Customs (HMRC) will sometimes claim that this is the case where one or more jointly owned properties are rented out, and this can have significant tax consequences.

We  have  noted  above  that  the  partners  in  a  partnership  are  jointly  liable  for  the  business debts.

There are, however, some varieties of partnership where this does not apply, and these are detailed in the following sections.

A “Limited Partnership”

A “Limited Partnership” is one where one or more of the partners has his or her liability limited to the capital he contributes to the partnership when he joins – like a shareholder, the worst that can happen to him is that he loses the money he invested, unlike an ordinary partner who might lose everything.

There are special rules for such partnerships:

  • At  least  one  of  the  partners  must  be  a  “general  partner”  who  has  unlimited liability, as with an ordinary partnership, and is responsible for running the business.
  • A limited partner is not allowed to withdraw any of his capital from the partnership until he leaves the firm.
  • A limited partner is not allowed to take part in running the partnership’s business, or to make contracts, etc., on behalf of the firm – if he does, he loses his limited liability and becomes an ordinary partner.
  • There are restrictions on how much tax relief such partners can have for any losses made by the partnership, and they cannot get tax relief for the interest on any money they borrow to invest in the partnership.

Such partnerships are rather specialised entities, but they can have their uses.

Case Study – A “Limited Partnership”

Mary  wants  to  set  up  a  new  business,  and  her  Aunt  Sally  is  prepared  to  invest  60% of the capital needed to help her, in exchange for a fair share of the profits. 

She doesn’t want to have “unlimited liability” so the obvious solution seems to be a company, but Mary would rather not incur the expense of setting up and running one.

Instead, the  new  business  is  set  up  as  a  limited  partnership,  with  Mary  as  the  General Partner and Sally as the Limited Partner.

This way, Sally has limited liability, as she would have had with a company.

In other words, a limited partner must be a “sleeping partner” – that is, a partner who does not get involved in running the partnership.

A Limited Liability Partnership (also referred to as an “LLP”)

This is a relatively new sort of business entity, which was made possible by the Limited Liability Partnership Act 2000.

Unlike  a  normal  partnership,  it  is  a  separate  legal  person  from  its  members,  but  for  tax  purposes  it  is  basically  “transparent”  like  an ordinary  partnership  –  each  partner  pays  tax  personally  on  his  or  her share of the partnership’s profits. 

As  the  name  implies,  the  partners  in  an  LLP  have  limited  liability,  like  shareholders in a company.

LLPs  have  proved  popular  with  large  professional  firms  such  as  accountants and solicitors, but as a general rule they are not appropriate for the smaller property investor or trader, being rather cumbersome to administer.

The  idea  of  LLPs  was  that  they  would  combine  the  advantages  of  a  company  (limited  liability)  with  those  of  a  partnership  (informality  and  flexibility).    

Some would say, however, that they also combine the disadvantages!

Except for unusual situations like the above Case Study, where someone wants to  invest  but  not  to  be  actively  involved,  the  most  suitable  form  of  partnership  for  the  property  investor  is  likely  to  be  the  traditional  or general Partnership Act type, as described above.

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