Set up your shop
What is the best entity to create a retail business?
4 July 2022
How you register your business will have a huge impact on the way your business operates. New business owners should have a good understanding of legal entities so they can choose one that best suits their business.
At Ankorstore, we know the passion, creativity and financial risk involved in starting a business. To assist retailers in getting off to the best possible start, we’ve detailed the various legal entities available. Among all the legal steps when opening a retail store, finding the right entity for your business is one of the most important. Reading this article will help you decide how to solve this administrative step when we are opening a retail store and find the most suitable legal entity for your retail store.
- What is a legal entity exactly? All you need to know
- What is the best legal entity to open a retail store?
- Common mistakes to avoid when registering a business
- How do I make sure my retail store’s legal entity is the right one?
- How to change the legal entity of a retail store? It’s easier than you think
What is a legal entity exactly? All you need to know
Do you know what a legal entity can do?
To ensure they meet their legal obligations, all businesses based in the UK should be registered with the government. It is the responsibility of the owner or owners to decide what legal structure they will register their business under.
- Good to know: The definition of a legal entity
The UK Companies Act 2006 defines a legal entity as “a body corporate or a firm that is a legal person under the law by which it is governed.” ¹
Under UK law, a legal entity has all the responsibilities and rights of a human being. This means that legal entities can act exactly as a real person would.
A legal entity will owe tax to Her Majesty’s Revenue and Customs (HMRC). A legal entity can enter into contracts and hire employees. It can own, buy or sell property. A legal entity can be held accountable for debts and can loan or borrow money. Legal entities can be sued in court and they can also be named in or file legal proceedings. A retail store may be owned by one legal entity or by several, each with its own separate identity.
What is not considered a legal entity
Not everything associated with a retail store is necessarily considered a separate legal entity. Trademarks, trading names and brands are considered personal property. While they may be owned by a legal entity, they are not considered to be a separate legal person.
A group of companies containing parent companies and subsidiaries is not necessarily one legal entity. These types of conglomerates can all hold their own legal identity and yet trade under one business name.
Retail stores that register as sole traders and general partnerships are not considered to be separate legal entities.
What is the best legal entity to open a retail store?
Retailers need to be careful when choosing a business structure. The right structure for a small bookstore will not suit an electronics store with aspirations to become a chain. The legal structure you choose for your retail store establishes your tax obligations. It can influence the way you raise financing. In the event of a legal problem, how you structure your business determines your personal liability.
The legal entity affects who has control over the company. The operational requirements and the scalability of your retail store are also impacted by what type of business structure you choose.
Opening a store? Choose the right legal structure
What type of legal entity is best for your retail store depends on a number of factors. When choosing a business structure for a retail store, owners should consider:
- How many people are going to act as owners of the store?
- Who is going to manage the retail store?
- How much risk is acceptable?
- Is personal liability a concern?
- What are the set-up and operational costs?
- What information do you wish to be made public?
- How large will your business be?
- Are you comfortable with complicated legal formalities?
- Are you planning on selling your store in the future?
Legal structures for retail stores explained
There are three main business structures in the UK:
- Sole proprietorships (also known as ‘sole traders’)
- Good to know: UK business breakdown at a glance
According to recent figures, there were 3.2 million sole traders registered in the UK. This accounts for 56% of the overall business population. The UK has more than 2 million registered companies and over 384,000 partnerships.
Most small to medium enterprises (SMEs) in the UK are registered as sole proprietorships – sometimes called sole traders. A retail store that registers as a sole proprietorship is owned by just one person. Small bookstores, speciality shops, record stores and boutique clothing shops are commonly run as sole proprietorships.
A sole proprietorship can hire employees. In the eyes of the law, a small trader can retain all profits from the store. They are also directly responsible for all debts and income tax obligations. Sole proprietorships do not need to register their trading name at Companies House.
This type of business structure requires little reporting, has few regulations attached to it and is cheap to set up. An owner will have complete control of their business. Personal assets are not separate from the business, so owners can be found personally liable for any debts incurred. Financing from investors is also difficult to obtain as a sole trader.
Matthew is a retired engineer. He wants to open a store catering to people who enjoy model trains sets. Matthew will run the business himself and doesn’t want to be bothered with loads of paperwork. He has a network of suppliers and customers gained from his years as a hobbyist. Mathew has no wish to expand his business or to bring anyone else into it. At this stage, his best option is to open as a sole proprietor.
A business structure is designated as a partnership when two or more people (or legal entities) act as owners. People who open a retail business with family members or friends often enter into partnership agreements. There are two main types of partnerships in the UK:
General partnership – General partnerships can be viewed as an extended version of a sole proprietorship. Two or more people can collect all profits and are legally responsible for any debts and tax obligations.
Limited liability partnership (LLP) – LLPs share similar traits to a limited company. Under this structure, a retail store can have two or more owners, but their responsibilities and liabilities vary. One partner will be a general partner who manages the business and is mostly liable for all tax obligations and debts. Other partners are listed as ‘limited partners’. Their liability is limited by the amount they have invested in the business.
- Example 1
Chris and Angela are a married couple who have given up their jobs to start a garden supply shop. They are content with having a small business that caters to local people. Neither one wants to deal with too much bureaucracy. The best option for Chris and Angela is to register their retail store as a general partnership.
- Example 2
Michael makes customised protective gear for mountain climbers. He wants to open a retail store but doesn’t have a good knowledge of business. Michael also requires help with funding. Alan and Kim are acquaintances of Michael’s. They both have business degrees and are interested in investing in the store. Michael, Alan and Kim would be best served by entering into a limited liability partnership.
Private Limited Liability Company (Ltd) – Large retail enterprises such as pharmacies, supermarkets and chain stores are usually registered as companies.
Private companies are owned by shareholders. Shares in these businesses cannot be offered to the general public. Companies are designated as separate legal entities. The liability of the shareholders to any debts incurred is limited by the amount they have invested. A private company is run by a director or by multiple directors.
Private companies have less personal financial risk for shareholders. There are heavier regulatory burdens but more favourable tax regimes. All annual accounts and reports must be accessible to the public. Companies must register at Companies House and pay an application fee.
Roger and Deborah are looking for investors to help them start a chain of home decor stores. Their goal is to start with three stores in their region and then expand across the country. If the stores are a success, Roger and Deborah hope to sell the chain for a profit. To achieve their goals, Roger and Deborah should register a company.
Common mistakes to avoid when registering a business
Common mistakes people make when registering retail businesses include:
- Using the incorrect address
- Choosing a business name that has already been taken
- Not filling out documentation correctly
- Signing with initials instead of their full name
- Assigning too many shares
- Appointing too many partners or directors
- Registering under the wrong business structure
- Not taking insurance depending on the entity choice
What happens if I don’t register my business correctly?
If you register a retail store under the wrong type of legal entity it can wind up being a costly mistake. You may be personally liable for debts incurred by other partners or from legal action taken against your store. An incorrect registration can also result in significant tax penalties.
How do I make sure my retail store’s legal entity is the right one?
The best way to ensure that you have the right legal entity is to speak with a business professional. An accountant who specialises in retail can advise you on what structure is best for your situation. You can also seek assistance in setting up a retail store from Ankorstore.
How to change the legal entity of a retail store? It’s easier than you think
It’s common for retail businesses to want to change how they are structured. A sole trader may wish to expand and take on a partner. A partnership may wish to incorporate as a company. A company may dissolve or be acquired.
The structure you have for your store isn’t set in stone. To change how you have set up your business, you must inform HMRC and complete the appropriate documentation.
HMRC must be notified if:
- Any changes are made to your business structure
- You stop being a sole proprietor
- A person leaves a VAT registered partnership
- A partner dies or becomes bankrupt
- You sell your business
- Your business closes
When you are starting out in business, you need all the help you can get. Take a look at the Ankorstart program from Ankorstore. It’s totally free and can provide you with a wealth of info you can use to start your business.
Do I need to register my retail store?
A retail outlet operating in the UK must register with HMRC under an appropriate business structure. If you are unsure of how to go about registering, contact a professional accountant, HMRC or a financial consultant.
What happens if I don’t register a retail store?
Failure to register a retail store at all will inevitably result in overdue tax on your income and heavy penalties. HMRC can issue fines of up to 100% of the taxable income on top of the amount due. If you are a sole trader or a partnership, you will need to register with your local government and HMRC. Companies must also register at Company House.
What types of legal entity can I choose for my retail store?
If you operate a small retail business on your own, you can register as a sole trader. If you have opened a clothing store with your partner or a friend, then a partnership is the best option. Any retailer that wants to expand their business and have limited liability and shareholders should incorporate as a company.
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