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 cases:
- 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 or Sole Proprietor: The simplest way to start
This is the simplest and most common way to run a business in the UK. 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.
That said, there is no legal separation between you and your business. You are personally responsible for all debts and liabilities. If your business can’t pay its creditors, your own personal assets—like your home and savings—could be at risk.
On the upside, running a sole trader business involves minimal paperwork and cost. You don’t have to register with Companies House and don’t need to publish accounts—what you earn is between you, your accountant, and HMRC.
You’ll need to register with HMRC and pay income tax and National Insurance on your profits through self-assessment.
Partnership: Sharing the responsibility (and the profits)
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, 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.
You don’t need to register the partnership at Companies House, but you should always have a written Partnership Agreement. This sets out how profits are shared, decisions are made, and what happens if a partner wants to leave, dies, or the partnership is dissolved. Without it, you’ll be relying on the default rules in the Partnership Act 1890—not ideal in today’s business world.
Not all partners need to be equally involved. Some may be “silent” investors who contribute capital but don’t participate in day-to-day management. Others may be “salaried partners” who don’t have a share in ownership but have a contractual arrangement to share profits.
As with sole traders, each partner is taxed individually on their share of the profits. There is no requirement to publish accounts.
Limited Liability Partnership (LLP): A flexible, protected model
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 to set out how the business will be run and how disputes will be resolved.
Limited Company: Full legal protection and growth potential
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.
FAQs: Your questions answered
Q: What is the most tax-efficient structure for a small business in the UK?
A: It depends. Sole traders and partnerships are simpler, with profits taxed as personal income. Limited companies may offer tax advantages at higher profit levels but come with more admin and a different tax structure.
Q: Can I switch from sole trader to limited company later?
A: Yes. Many UK businesses start as sole traders or partnerships and incorporate as limited companies when they grow or want liability protection.
Q: Do I need a written agreement if I start a partnership or LLP?
A: Yes, it’s strongly recommended. A Partnership Agreement or Members’ Agreement can prevent disputes by clearly outlining roles, profit shares, and exit terms.
Q: Will my business details be public if I form an LLP or limited company?
A: Yes. LLPs and limited companies must file accounts and confirmation statements with Companies House, which are publicly available online.
Q: Is there a legal difference between being a sole trader and self-employed?
A: No. “Sole trader” is a type of self-employment. If you’re running your own business and not incorporated, you’re classed as self-employed.
Q: What’s the main benefit of setting up a limited company?
A: The key advantage is limited liability. Your personal assets are generally protected if the company faces financial difficulties.
Q: Who decides which structure is best for my business?
A: You do—but ideally with input from legal and financial professionals. The right choice depends on your plans, risk tolerance, and operational needs.
Which structure is right for your business?
There’s no single “correct” choice—it depends 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.
About the Author
Victoria Holland works with a broad range of clients, including large multinational companies, start-ups, SMEs, partnerships, investors, and entrepreneurs. She has extensive experience providing transactional and commercial contract advice across various industries, such as automotive, biotech, property management and investment, financing, software and technology.