As of January 2012, there were an estimated 4.8m small and medium-sized enterprises (SMEs) in the UK, accounting for 99.9% of all enterprises in the country (UK House of Commons Library 2012). Together they accounted for nearly 60% of private sector employment and 49% of private sector turnover. Small enterprises alone (defined as those with fewer than 50 employees) accounted for 46% of private sector employment and 35% of turnover. Collectively they employed an estimated 14m people and recorded a combined annual turnover of £1.5 trillion.

The number of business enterprises in the UK has increased significantly in recent years. The total has risen by 39% since 2000, virtually all this growth being driven by SMEs – their numbers have risen from 3.5m in 2000 to 4.8m in 2012. Over the same period the estimated number of ‘large’ private sector businesses has decreased from 7,200 to 6,300.

Only a minority of SMEs in the UK benefit from the protection of limited liability. Of the 4.5m enterprises in 2011, 28% were corporate bodies of one kind or another, 62% were sole traders and 9% were partnerships. Since only corporate bodies are required by law to prepare and publish annual accounts, and comply with other legal rules regarding financial management and administration, this means that the great majority of enterprises in the UK already operate outside the framework of company law.

There has been a significant increase in the number of enterprises without employees: at the start of 2012, 74% of all private sector businesses (3.6m enterprises) had no employees at all. These enterprises, collectively, had an estimated turnover of over £200bn. Companies are more likely to have employees than unincorporated businesses: in 2012, 59% of the 1.3m companies had employees, as opposed to 35% of partnerships and only 10% of sole traders.

The importance of the SME sector, in terms of its contribution to business activity, turnover and employment, has been acknowledged by successive UK governments. Its role has taken on even more political significance given the aftermath of the financial crisis of 2007–8, which has resulted in substantial cutbacks in public sector spending and employment. The UK government, in common with other countries in a similar position, has invested great hopes that the private sector, especially the SME sector, can lead the way back to economic recovery, and so has embarked on a number of high-profile initiatives to try to encourage enterprise and growth.

When it came to power in 2010, the new coalition government declared its commitment to providing more opportunities for SMEs to win central government procurement contracts – it set itself a target of increasing the SME share of such business from 6.5% to 25% by 2015. It committed itself to reducing the overall burden of regulation for all UK businesses but especially for SMEs (which are widely viewed as suffering disproportionately from regulation because of their comparative lack of administrative resources). With a view to achieving this target, it instigated a project to review all existing regulations and to invite feedback from businesspeople and individuals across the country as to which specific regulations should be withdrawn. Part of this project involved a pledge not to introduce any new regulations until it had deleted existing ones. It also initiated a review of enforcement practices, again inviting feedback on examples of inappropriate or excessive enforcement of regulation, with a view to reforming them or eliminating them.

Thus, the SME sector occupies a key position in the UK economy, a position which has assumed a heightened profile as a result of the national and international economic crisis. The drive to reduce regulatory burdens of various kinds, as a means of encouraging growth and employment, has become a key feature of this environment.

In the World Bank’s index, Doing Business 2013, published in October 2012, the UK ranked seventh out of 185 countries for the ease of doing business.


As already indicated, over two-thirds (71%) of SMEs in the UK operate as unincorporated bodies. For those that choose to incorporate, the principal options available are as follows.

1. Private company limited by shares

This is the most popular option for SMEs that wish to trade as companies. The great majority of companies are private, and the great majority of them are ‘small’ (the primary test for this, at the time of writing, is having turnover below £6.5m). Despite the fact that most companies are now ‘small’ and owner-managed, the fundamental assumption in UK company law is that in every company there is a division of responsibilities between the shareholders who own the company, and the directors who run it. This assumption still by and large applies in relation to the private company, and there is still an onus on the directors to be accountable to the shareholders, even if they happen to be one and the same.

Template Design © VibeThemes. All rights reserved.