Grasshopper is leaving the UK

We embarked on a journey to provide small businesses with a professional phone system. As of January 2018, we will no longer be accepting any new signups.

We will help our current customers port their numbers over to another carrier before we officially shut down the service on 30 April 2018.

Doing business in the US? Visit our US site.


Choosing a business structure

Now that we’ve gone through the building blocks of how to build a great company, it’s time to get down to the nuts and bolts. Sure, this stuff isn’t as glamourous as a lot of the other parts of starting a business, but it’s arguably the most important part.

Feeling lost? The UK government has very thorough resources for helping you with the practical details of business. They may not help you generate great company culture or offer assistance in building your product, but they will help you understand tax requirements, laws, regulations, and other fundamentals.

Sole trader, limited company, or business partnership?

Ok, so you’ve done some research, picked a great name, web domain and phone number to back it up, but now it’s time to get legally recognized as a business.

Sole trader, limited company, or business partnership? These are all ways that the government can understand what sort of business you are so they can tax you accordingly.

Registering as a sole trader

Sole traders run their businesses on their own. If you’re a sole trader, you’re a self-employed individual.

This structure is the most simple and the easiest to understand. In order to become a sole trader, you must register with HM Revenue and Customs (HRMC) and follow a set of rules.

These rules include:

For your taxes, you’ll have to register as self-employed and for the Class 2 National Insurance (use form CWF1).

Advantages and disadvantages of being a sole trader

If you’ve decided to take on this endeavor by yourself and don’t plan on growing quickly, being a sole trader is probably the way to go. The advantage? Complete control.

Unlike a limited company or business partnership, there aren’t complicated agreements that determine ownership. If you’re a sole trader, you can run the business however you want, provided you follow the UK’s established rules.

The PROS THe Cons

Complete control and flexibility to run the business as you see fit

Personally liable for all business debts, you’re all by yourself

Unlimited liability means creditors are more likely to extend credit if needed

Banks are reluctant to give loans due to higher turnover rates and usually smaller assets

You receive all business profits

Creditors can go after your personal property to satisfy a claim if your business assets aren’t enough

Smaller amounts of capital make for easier organization

Since the business relies on one person only, it is harder to raise capital on a long-term basis

Limited company

If you’re planning on growing and building a company larger than yourself, a limited company is a good option. A limited company is separate from you. Its finances are separate from your personal finances. Its profits are separate from yours.

“I started as a sole trader, but I’m considering altering this to Limited ─ in part as a way to protect myself as an individual, but also as I think it may provide a little more clout.” – Elliot Simmonds of Rippleout Marketing

Each limited company has members, or people who own the business. Directors must manage the company, and the company is subject to Corporation Tax before distributing profits.

Those who own a limited company are subject to liability, just like sole traders, but their liability is limited to the number of share they own. A limited company can be public, that is, it can be traded on the London Stock Exchange.

Those who own a limited company are subject to liability, just like sole traders, but their liability is limited to the number of share they own. A limited company can be public, that is, it can be traded on the London Stock Exchange.

Advantages and disadvantages of limited companies

The PROS THe Cons

You are protected since you are a separate entity from the business

More paperwork is required to get running

Multiple people can own shares

Less control if there are multiple shareholders, or if the company is publicly traded

More official and professional seeming to investors

Banks still require some personal liability

Business can be easily transferred

Accountancy fees will be much higher

Tax rate is less than for sole traders

Company dividends can not go to pensions

You can establish a pension scheme that is better for employees

PAYE if you have/will have employees

‘Ordinary’ business partnership

An ‘ordinary’ business partnership is a way for you to share ownership of your company with another person (or people). You all share responsibility, and you also share business profits. In an ‘ordinary’ business partnership, each partner individually pays taxes on their profits.

Liability is similar to that of a sole trader. If your business has significant losses, you will be held responsible. You are also responsible for the costs of equipment. Your partner doesn’t have to be an actual person, either. Your partner could be another company ─ a limited company legally counts as a person.

In order to become an ‘ordinary’ business partnership, you must register your business name with HM Revenue and Customs (HMRC).

Advantages and disadvantages of ‘ordinary’ business partnerships

The PROS THe Cons

Shared responsibility over the company’s liabilities

Potential for conflict with partners if you don’t know them extremely well

Multiple people can invest startup capital

Need to settle on a very clear agreement on liabilities, ownerships and profits

Partnerships are easier to form and run than limited companies

All partners are responsible for all debts

Shared decision-making

Taxation is the same as sole traders, so taxes are high

Limited liability partnerships (LLPs)

A limited liability partnership is much like an “ordinary’ business partnership, only you are not personally responsible for business losses. All they are responsible for is the money they initially invested. This is a great option if you want to protect yourself, but requires more paperwork and generally more administration than an ‘ordinary’ business partnership.

Taxes are the same as in an ‘ordinary’ business partnership. Each member must pay taxes based on their share of the profits. In order to create an LLP, you’ll need to choose a name, have more than one member, have a physical business address, create an agreement, and register with Companies House.

Unincorporated associations and social enterprises

If your business is helping people and not out to make a huge profit, you can register as a social enterprise. In the UK, you have a lot of options. You can form your social enterprise as a:

All of these options have pros and cons. The best options, at least in terms of taxation, require a large amount of paperwork to prove that you are truly dedicated to a social cause.

I am the tax man

As a business, you’re going to have to pay taxes to the UK government. Different legal structures have different tax rules, but all must register new businesses with HRMC. On the HRMC website, you are able to register for self assessment if you are a sole trader, corporation tax if you’re a limited company, PAYE if you are hiring employees, and VAT if you are a new business.

We highly recommend hiring an accountant to make sure your taxes are in order. It is not worth the risk to mess this up. An accountant can help you with more than just taxes ─ they can give you advice about how to structure your company, help you write a business plan, and help create realistic forecasts and budgets.

Intellectual property issues

As you start and grow a business, be aware of intellectual property issues such as UK patents and copyrights.

Think about whether you need to:

For more information on intellectual property, visit Gov.uk’s site on the topic.