Business Structures: Choosing the Right Option for You
Starting your own business is an exciting challenge, but before you take your first steps, choosing the right business structure is essential. Your decision at the outset can influence everything from how you’re taxed to how much personal financial risk you take on.
There is no “one-size-fits-all” solution. It all depends on your individual circumstances, who you’re going into business with (if anyone), and what you want your future business to look like.
This article looks at the main types of business structures most commonly used by UK small business owners and professionals. While there are other, more specialist structures available, these four cover the vast majority of businesses:
- Sole Trader
- Partnership
- Limited Liability Partnership (LLP)
- Limited Company
Each comes with pros and cons, and understanding these differences will help you make a more informed choice.
Sole Trader
As a sole trader, you own and operate the business as an individual. You get to keep all the profits (after tax) and make all the decisions. From an administrative perspective, being a sole trader is relatively straightforward as you don’t have to register with Companies House or publish annual accounts. You’ll need to register with HMRC and pay income tax and National Insurance on your profits through self-assessment.
That said, there is no legal separation between you and your business. You are personally responsible for all debts and liabilities of the business. If your business can’t pay its creditors, your own personal assets—like your home and savings—could be at risk.
Partnership
A partnership may be a suitable option if you’re going into business with someone else. It allows two or more people to run a business together and share the profits (and losses).
Partnerships are relatively straightforward to set up. However, unless otherwise determined in a Partnership Agreement, all partners are jointly and severally liable for the business’s debts. This means each partner can be held personally responsible for all the debts, not just a share.
As with sole traders, partnerships don’t need to register the partnership at Companies House, which makes the process of setting up a partnership straightforward. We do however strongly advise that partners enter into a Partnership Agreement. This sets o
ut how profits are shared, decisions are made, and what happens if a new partner is to join the partnership, or a partner wants to leave or dies. Without it, you’ll be relying on the default provisions of the Partnership Act 1890. For example, in the absence of a Partnership Agreement confirming otherwise, the partnership will automatically dissolve on the death of a partner, regardless of whether the surviving partners wish to continue with the partnership.
As with sole traders, each partner is taxed individually on their share of the profits and there is no requirement to publish annual accounts.
Limited Liability Partnership (LLP)
An LLP is a hybrid model that offers the flexibility of a partnership with the added benefit of limited liability. It’s a popular choice for professional services firms, such as accountants, solicitors, and consultants.
In an LLP, the business is a separate legal entity. This means the partners—called ‘members’—are generally not personally liable for business debts. Their liability is limited to the amount they have invested or agreed to contribute to the LLP.
LLPs must be registered with Companies House and file annual accounts and confirmation statements. These are published online, so there’s less financial privacy than with a traditional partnership or sole trader.
An LLP is taxed like a partnership. Members are taxed individually on their share of the profits, and the LLP is not subject to corporation tax.
Members typically have the right to manage the business and share its profits. Like partnerships, LLPs benefit from having a detailed Members’ Agreement or Partnership Agreement to set out how the business will be run and how disputes will be resolved.
Limited Company
A limited company is a separate legal entity, distinct from the individuals who own or manage it. This structure offers the strongest protection for personal assets, as liability is limited to the value of the shares held in the company.
There are two main roles within a limited company:
- Shareholders own the company
- Directors manage the day-to-day running of the business
The same people often fill both roles in small companies.
The company must have at least one director registered at Companies House. It is legally required to file annual accounts and a confirmation statement. The company pays corporation tax on its profits.
Directors who are also employees are taxed via PAYE on their salaries, while shareholders who receive dividends are taxed through self-assessment. This creates a form of “double taxation”— unlike sole traders or partnerships, where the business and its owners are treated as one for tax purposes.
Although this structure involves more admin and compliance, it can also bring credibility and make raising investment or applying for business finance easier.
Which structure is right for you?
Selecting the right structure for you is going to depend on your plans, risk tolerance, and how you want to run your business. Many businesses start as sole traders or partnerships and later move to an LLP or limited company as they grow or take on more risk.
If you’re thinking of starting a business or changing the structure of your existing business, it’s worth getting professional legal and financial advice to help you make the right decision.
Annie Hill – Trainee Solicitor