Whether in cryptocurrency or not, when starting a new business or project, you’ll have to decide on a legal structure to use. This is an important decision which affects issues such as liability, publicity requirements, ongoing expenses and tax. Your choice may depend on the number of people involved, the management structure you want in place and how you want to raise money.
We can advise on which specific structure will work best in your situation, but in this article we’ll give an overview of the basic options. For more complex structures and/or restructures, or if you’re interested in jurisdictions other than the UK, please get in touch today via our contact form.
Operating as a sole trader
One of the main disadvantages of operating as a sole trader is that you will have unlimited personal liability to third parties, so in the event of a dispute or a claim against you, any assets you hold in your name will be at risk. Your business will not have a separate legal identity to you, although you can use a trading name.
This option will work best if you are operating on your own and it has the benefits of not involving any start-up expenses or requiring any public disclosures (with the exception, of course, of filing tax returns). Other than an accountant and any insurance you wish to take out, there will be no ongoing expenses. You will be liable to pay UK income tax (at rates of up to 45%) and National Insurance Contributions, and you may also need to register for and charge VAT.
As a sole trader, the main option for raising funds is taking on debt, for which you will be personally liable. You won’t be able to issue shares. If you wanted to sell your business in the future, be aware that a sale can be more complicated. A significant amount of the business’ value is likely to be in your involvement and contribution and you may only be able to sell the business’ assets.
For all of these reasons, operating as a sole trader is no longer a popular option and not something we would recommend to anyone operating in the crypto space.
Operating through a partnership
A partnership is a very old legal structure which involves at least two people running a business together. Each partner is personally liable to third parties, and share joint liability in contract disputes and joint and several liability in tortious claims. This means that you need to trust in your partner as you may be held personally liable for their mistakes or misdeeds, and your personal assets would be at risk in such a situation.
We strongly recommend entering into a partnership agreement to govern how your partnership will work, but otherwise there are no start up expenses and no disclosure requirements other than an annual personal tax return. Your partnership agreement can put in place a management structure and include provisions for what happens if you and your partner disagree on something. Without a partnership agreement, you’ll be subject to the default provisions in the Partnership Act of 1890. Again, other than yours and your partner’s investment, the main way to raise funds will be to take on debt, for which the partners will be personally liable.
Again, this is not a structure we commonly see or recommend in Web3, with alternatives offering founders more protection.
Operating through a limited partnership
Limited partnerships are another old legal structure which is used as an investment vehicle and allows for a business with a silent investor. The general partner manages the partnership day-to-day, whereas the limited partner is not involved in management and is a passive investor. The limited partner’s liability to third parties is capped at the amount of their investment in the limited partnership, whereas the general partner has unlimited personal liability.
Limited partnerships have to be registered at Companies House and file information about the partners publicly, but accounts and financial statements need not be filed. A limited partnership is not a separate legal entity. Both partners must file tax returns.
Operating through a limited liability partnership (LLP)
LLPs are a lot more common than the other forms of partnership, and are a much newer legal structure. Unlike partnerships and limited partnerships, LLPs are a separate legal entity and offer their members the protection of limited liability - members are only liable to third parties up to the amount they have contributed to the partnership. An LLP needs at least two members.
The downside is that LLPs must be registered at Companies House, and have to identify and publish a registered office address, the details of the members, annual accounts, annual confirmation statements and information regarding persons with significant control. We recommend putting in place a Members’ Agreement, which does not have to be published and can remain confidential. This can include a variety of provisions to govern how the LLP will operate, allowing for a flexible management structure. LLPs can’t issue shares, but can take out debt and have its assets subject to floating charges (a specific form of debt over all the assets of the LLP).
Operating through a private limited company
In most cases, the company will be the best legal structure for your business. A company does not need more than one person (unlike a partnership) and has the benefit of limiting your personal liability and protecting your assets (unlike sole trading). We will focus on private companies here as public companies are unlikely to be suitable for start up businesses.
However, there are start up expenses required to register the company with Companies House, and you must publish a memorandum of incorporation and articles of association which explain how the company is governed. Usually, the standard templates provided by Companies House are suitable, but if you have a complex management structure or have different classes of share, you may need a lawyer’s help to prepare these.
The publicity requirements for companies are also the most extensive - you must identify and publish a registered office address, the details of the director(s), secretary and shareholders, annual accounts, annual confirmation statements and information about the persons with significant control. Many changes made to a company also need to be notified to Companies House, which may require company resolutions to be drafted and formal meetings to take place.
Companies allow a lot of flexibility of management structure, but are essentially run day-to-day by the director(s), who are subject to strict duties to manage the company and its funds properly. Shareholders ultimately own the company and exercise control through voting; their consent is required for various decisions. Companies can take on debt (without their members being personally liable for that debt) and issue floating charges, but can also raise funds by issuing shares, with a lot of flexibility in terms of the rights attached to those shares.
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