Business structures: limited company, sole trader, partnership, LLP

If you want to start a business in the UK, you will typically work as a sole trader, in an unincorporated partnership, your own limited company, or a limited liability partnership (LLP).

The sole trader and limited company routes are the most commonly used of these business structures.

Choosing the right structure depends on factors such as liability if things go wrong, tax efficiency, and the responsibilities you’re willing to take on.

In this article, we look at some of the key features of each of the main structures.

Also, please look at our comprehensive limited company vs. sole trader comparison table. This table highlights some important differences in taxation, legal requirements, and operational flexibility.

Sole Trader

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 immediately.

There is minimal paperwork involved, and you don’t need to register or deal with Companies House.

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 Self Assessment.

This simplicity makes it an attractive choice for freelancers and small business owners who are just starting out and don’t want the added complication of incorporation.

Significantly, if you are self-employed, and your business experiences financial trouble, you are liable for any debts your business may have incurred.

This unlimited liability can pose a significant risk, particularly if your business requires a capital injection or involves a lot of financial uncertainty.

Find out in this GOV.UK guide to being a sole trader.

Partnership

This umbrella business structure is used by two or more individuals who wish to start a 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 before going into business with other people.

The agreement should cover key aspects such as profit sharing, decision-making processes, and dispute resolution procedures.

Read more in our guide to setting up a partnership.

Limited Company

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).

This separation is particularly beneficial if you plan to reinvest profits or need to maintain clear financial records for potential investors or partners.

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.

These include filing annual accounts with HMRC and Companies House, submitting a confirmation statement each year, and sticking to the rules set out in the Companies Act 2006.

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.

Failure to comply with these obligations can result in penalties or disqualification as a director.

Limited companies are subject to Corporation Tax on their profits. If you are a director, you also need to pay tax on any salary and dividends you draw down from the company.

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.

It is a flexible structure that allows partners to benefit from limited liability while retaining the operational simplicity of a standard partnership.

Although the partners of an LLP share limited liability, similar to limited company directors, they are taxed individually, not as one entity.

This means each partner reports their share of income and expenses on their individual self assessment tax return.

The company is a separate entity governed by company laws and regulations, similar to the limited company regime.

This provides the LLP with legal continuity, meaning the business can continue to operate even if the partners change.