Choosing the Right Legal Structure for Your Hospitality or Leisure Business
A practical guide for pubs, restaurants, hotels, attractions, clubs, cafés and leisure operators considering how best to set up, protect and future-proof their business.
The structure you choose matters
Hospitality and leisure businesses are often built on energy, opportunity and personal relationships. For example, a chef and front-of-house manager open a restaurant together, a family takes on a pub tenancy or friends launch a gym, escape room or campsite. In the early days, the focus is usually on premises, staffing, customers, bookings and cash flow.
The legal structure can feel like an administrative detail - but it is not.
The choice of structure affects who owns the business and who controls decisions. It also governs how profits are taken, how risk is shared and how easily investment can be raised and what happens if one owner wants to leave, becomes ill or dies. For businesses in the hospitality and leisure sector, where margins can be tight and day-to-day decisions are fast-moving, getting this right at the outset can avoid significant disruption later.
Sole trader
A sole trader structure is simple and common for smaller operators such as pop-ups, mobile catering businesses, independent consultants and owner-managed ventures. There is no separate legal identity between the owner and the business. The owner makes the decisions, receives the profits and carries the responsibilities.
That simplicity can be attractive, but it also means personal exposure. If the business cannot pay its debts, or if a claim is made against it, the owner’s personal assets may be at risk. That can be a serious consideration where a business has premises, employees, suppliers, licences, equipment finance or long-term contracts.
Partnership
A partnership may arise where two or more people carry on business together with a view to profit. It can be flexible and straightforward, which is why it is sometimes used by family-run or owner-operated hospitality businesses.
The danger is assuming that a partnership can safely rely on trust alone. Without a written partnership agreement, default legal rules may apply. Those rules are unlikely to reflect the detailed commercial understanding between the owners, particularly where, for example, one person has contributed more capital, another works longer hours, or the parties have different expectations about drawings, holidays, reinvestment or exit.
A partnership agreement can set out how profits and losses are shared, who has authority to bind the business, how decisions are made, what happens if a partner leaves, and how disputes are resolved. It is far easier to agree these points while everyone is on good terms than after a disagreement has arisen.
Limited liability partnership
A limited liability partnership, or LLP, is a separate legal entity. It can offer more protection than a traditional partnership while preserving a partnership-style management approach. This may suit businesses where the owners want flexibility but would prefer not to operate through an ordinary partnership.
An LLP will usually require more administration than a simple partnership, including registration and filing obligations. The members should also have a members’ agreement in place covering broadly the same practical issues as a partnership agreement: contributions, profit shares, decision-making, departures, restrictive covenants and deadlock.
Limited company
A limited company is a separate legal person from its shareholders and directors. It can enter into contracts, employ staff, own assets and incur liabilities in its own name. For many growing hospitality and leisure businesses, this structure is attractive because it can limit personal liability and make ownership easier to define.
A Company can issue, transfer or re-organise its share capital, which as a structure can also help with investment, succession planning and the sale of the business. Lenders, landlords and investors may be more familiar with the company model.
However, incorporation does not remove the need to think carefully about the relationship between the owners. The company’s articles of association will deal with some matters, but they are rarely enough on their own. A shareholders’ agreement can sit alongside the articles and deal privately with the commercial arrangements between the shareholders.
Why a shareholders’ agreement is worth discussing early
A shareholders’ agreement is particularly important where there is more than one shareholder, even if the shareholders are family members or long-standing friends. It can record who owns what, how key decisions are approved, whether shareholders must work in the business and what happens if someone wants to sell, and how shares are valued in that situation.
In hospitality and leisure, this can be especially important. A business may depend on one person’s premises knowledge, another person’s operational skill, and another person’s financial backing. If one shareholder stops contributing, becomes unwell, suffers financial difficulty, separates from a spouse or wants to exit, the business needs a clear route forward.
The agreement can also include restrictions to protect the business, such as limits on shareholders setting up in competition, taking staff, approaching customers or misusing confidential information after they leave.
Partnership agreement or shareholders’ agreement?
The right agreement depends on the structure. If the business is a traditional partnership, a partnership agreement should be considered. If the business is a limited company, a shareholders’ agreement is the relevant document. If the business is an LLP, a members’ agreement may be appropriate.
What matters is not the label but the protection. The agreement should reflect how the business actually works, who is investing time and money, how control is shared, and what should happen if circumstances change.
Do you need to think about a business Lasting Power of Attorney?
Business owners are often good at planning for busy trading periods, staff shortages, supply problems and seasonal peaks. However, they are not always as quick to plan for what would happen if they personally lost capacity and could not deal with business decisions, banking, contracts, employees or suppliers.
A business Lasting Power of Attorney can allow a trusted attorney to make business-related decisions if the owner is unable to do so. This is not something every business will need in the same form, and it should be considered alongside the business structure and constitutional documents such as any partnership, members’ or shareholders’ agreement.
For a sole trader, the issue may be particularly acute because the business is closely tied to the individual. For a company, the position may depend on who holds shares, who is a director and whether others have authority to keep the business moving.
For a partnership or LLP, the agreement between the owners should be checked carefully so that personal incapacity does not create uncertainty or conflict.
Getting it right before there is a problem
No one starts a hospitality or leisure business expecting the relationship between owners to break down, or expecting illness, incapacity, funding pressure or a disagreement over exit. But these things can happen. When they do, the absence of a clear agreement can make an already difficult situation more expensive and disruptive.
Choosing the right structure, and putting the right agreement in place, gives the owners a framework. It helps the business keep operating, protects relationships where possible, and gives everyone a better understanding of their rights and responsibilities.
If you are setting up, expanding, restructuring or reviewing a hospitality or leisure business, it is worth taking advice before decisions become urgent. A short conversation at the start can often prevent a much more difficult conversation later.
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This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek advice specific to your own circumstances. Fraser Dawbarns LLP is always happy to provide such advice.