If you want to start a business in the UK, you will typically work as a sole trader, as an unincorporated partnership, via your own limited company, or via a limited liability partnership (LLP).
Of these business structures, the sole trader and limited company routes are the most commonly taken, for a number of reasons. In this article we look at some of the key features of each of the main structures.
Also, take a look at our comprehensive limited company vs. sole trader comparison table.
This is seen by many as the ‘hassle free’ way of starting up in business. As soon as you have informed HMRC of your decision to go self employed, you can start trading right away.
Under the sole trader model, there is no distinction between your personal and business finances in terms of taxation. You pay any tax you owe via the Self Assessment process.
Significantly, if you are self-employed, and your business experiences financial trouble, you personally are liable for any debts your business may have incurred.
Find out in our guide to becoming a sole trader.
This umbrella business structure is used by two or more individuals who wish to go into business together, but without incorporating.
As with the sole trader model, partners will share the risks of running a business together, and all partners are personally liable for any debts the business may owe.
You should always have a well constructed partnership agreement in place before going into business with other people.
The limited liability company route offers some protection to its directors, in that the liability of its members is limited to the value of any shares held.
Your personal and business finances are kept distinct (unless you are found to have acted carelessly or fraudulently).
The limited company can be a tax efficient way of working, particularly as dividends are not subject to National Insurance Contributions (NICs). You also have various tax planning options, which are unavailable to sole traders, for example.
Limited company directors do have a number of statutory and legal obligations, which sole traders do not. Ultimately, directors are responsible for the well-being of their companies, and for the accuracy of all accounts and other submissions to HMRC and Companies House.
Limited companies are subject to Corporation Tax on their profits.
Limited Liability Company (LLP)
In many ways, an LLP is a hybrid of the partnership model and a limited liability company. You can read our full guide here.
Although the partners of an LLP share limited liability, in a similar way to limited company directors, they are taxed individually, not as one entity.
The company is a separate entity in its own right, and is governed by company laws and regulations, in a similar way to the limited company regime.