When you start a business, you have to select the right structure for you. As your business adapts and grows in the future, you might decide to change the structure to suit your ambitions better.
The structure you choose will impact everything from your tax obligations to your personal liability and the administrative responsibilities you’ll face.
In the UK, there are four main business structures to choose from: sole trader, partnership, limited company, and limited liability partnership (LLP). Each structure has its pros and cons, so it’s essential to understand them to make an informed choice for your business. This article will outline the key features of what you need to know about choosing the right structure for your business.
Sole traders
Operating as a sole trader, or sole proprietorship, is the UK’s simplest and most common business structure. As a sole trader, you run the business as an individual or work for yourself – full-time or on a part-time basis as is best for you.
As a sole trader, there is no legal distinction between you and the business. In other words, you are personally liable for any debts or legal issues that arise from your business. Therefore, your personal assets (e.g., house, savings) could be at risk if your business runs into financial trouble or someone makes a claim against you. This is called unlimited liability and is one of the more risky ways of running a business.
However, running a sole proprietorship is relatively simple, with few administrative responsibilities. You are not required to publish any financial information annual accounts or deal with company filings, for example, but you must keep records of your income and expenses and file a self-assessment tax return annually.
From 1st April 2026, the Income Tax Self-Assessment (ITSA) system will be extended to certain sole traders whose income exceeds a threshold of £50,000. These sole traders will be required to file their tax returns quarterly using Making Tax Digital (MTD) software. This update will require sole traders to adapt to the new digital filing process and ensure they comply with the quarterly reporting requirements. MTD is likely to be quite a burden, especially for small businesses. Speak to us to find out how we can guide you through these new rules and requirements.
Sole traders pay income tax on profits after deducting business expenses. Income tax is a progressive tax, which means higher portions of income are taxed at higher rates:
| Band | Taxable income | Tax rate |
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271-£125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Overall, operating as a sole trader may be ideal for a new business, depending of course upon your attitudes to risk. It is a simple process to register and run your business and lower earners don’t face too brutal a tax regime. However, changing your trading structure may be a smart move as your operations become more complex.
Partnerships
A partnership involves two or more people running a business together, sharing responsibilities and profits. It’s a straightforward way to pool the resources and skills of individuals with various experiences.
Like sole traders, partners have unlimited liability, which means they are responsible for the business’s debts. Each partner also pays income tax on their share of the profits. So, the partnership itself isn’t taxed, but each partner must report their earnings through separate personal self-assessment tax return. From a risk perspective, partnerships also come with joint and several liability which needs to be considered very carefully if a partnership is your preferred trading vehicle.
You should also be aware that partnerships have more administrative work than sole traders. For example, it is good practice for partners to draw up a partnership agreement to avoid disputes, keep accurate financial records, and file annual self-assessment tax returns for each partner.
Limited company (Ltd)
A limited company is a separate legal entity from its owner (or shareholder). It may seem like a small, technical distinction, but it gives the company owner limited liability. This means that your personal assets are protected if the company experiences financial difficulties, reducing some of the risks of running a business.
However, limited companies have more administrative responsibilities than sole traders or partnerships. You must register with Companies House which will include the publication of your annual accounts, submit a corporation tax return, and more.
You will pay corporation tax, 25% for profits over £250,000 and 19% for profits below £50,000. Profits between these thresholds will be taxed at 25%, but marginal relief will be available. Compared to income tax, you’ll notice that this tax structure will benefit you if your company earns a relatively high amount.
Furthermore, shareholders can draw dividends from company profits, which are taxed lower than regular salaries. Therefore, company owners can have more control over how they decide to pay themselves. That being said, all dividend and remuneration planning needs to be considered carefully and with careful attention to anti-avoidance tax legislation. This is an area where we can offer you expert advice and guidance.
Finally, limited companies can sell shares to investors, which gives up some ownership of the business in return for investment. That alone can offer particularly ambitious individuals the chance to significantly scale up their operations.
Limited liability partnership (LLP)
LLPs combine elements of partnerships and limited companies. Simply put, they are partnerships in which the partners’ liability is limited to the amount they invest in the business.
LLPs must be registered with Companies House and file annual financial statements, but they do not have the same reporting requirements as limited companies. Instead, for example, members must file self-assessment tax returns individually for tax purposes: the LLP itself pays no tax on its profits.
LLPs are ideal for professional services firms (such as law firms and accountants) where members want the benefits of limited liability but also want to share responsibility and profits like in a regular partnership.
Choosing the right structure
Which business structure would be right for you? It’s a difficult decision but not one you have to make alone. Get in touch for expert advice and ensure your business is set up for success from the start.
This article has provided some guidance on choosing the right structure for your business, but contact us for tailored advice. We’ll help you achieve your goals and ambitions, one step at a time.
