Business structure

types: limited
company vs sole
trader vs partnership
4min read
by Nick Green
Last updated 01 December 2022

The way in which your business grows, pays tax, takes big decisions and deals with
liabilities will depend on its legal structure. This is something you decide at the outset,
but can change later on if it becomes desirable. In the UK there are four popular types
of business structure.

The different types of

business structure:
 sole trader
 partnership
 limited company (Ltd)
 limited liability partnership (LLP)

All of these business structures have advantages and disadvantages, depending on

factors such as the size of your business, the nature of your business and your future
plans for it. Here's a quick summary of each type of business structure, and how they
compare against each other.

Sole trader ('self-employed')

Being a sole trader is often referred to simply as being 'self-employed', though there
are other forms of self-employment (such as being a contractor). Sole trader is the
most popular structure for a startup, and also the simplest. You pay income tax on
your profits (rather than corporation tax), so any profits above £45,001 will be taxed at
40 per cent, and profits above £150,000 will be taxed at 45 per cent. Depending on
your profits, you may also have to pay National Insurance (NI) contributions.

Being a sole trader doesn't necessarily mean you work alone. You can employ staff, so
long as you inform HMRC and follow employment law.

Advantages of being a sole trader

As a sole trader you pay no fees to register, you have very little red tape, and you are
in full control of business decisions. You also get to keep all the profits from the
business, after tax.

Disadvantages of being a sole trader

The main drawback is that your business and personal finances are not legally
separate. This means that, if the business has debts or is sued, any liability can be met
from your personal wealth. This exposes you to more personal risk than other business
structures, so may not be suitable for a high-cost startup.

Summary: A simple and agile structure, but with a lot of personal risk.

Partnership
In a partnership, a number of individuals sign a partnership agreement to establish
how the business’s ownership, profits and liabilities are shared between them, and
how partners may leave the partnership.A partnership is similar to the sole trader
structure, except that there are at least two of you. There is no legal upper limit to the
number of partners, though very large partnerships can be riskier to manage
(see Limited Liability Partnerships). Each partner registers as self-employed and
submits a separate tax return. Your tax and NI obligations are similar to those of a sole
trader.

Advantages of a partnership
The advantages of a partnership are flexibility and simplicity, with the added bonus of
having more owners to run the business.

Disadvantages of a partnership
In a partnership, all partners are jointly responsible for all the business debts. This
means for instance that if one partner is sued successfully, all partners must share the
damages.

Summary: A streamlined setup for business partners who know and trust each other
well.

Limited company
Incorporating your business as a limited company requires you to register it
at Companies House. This creates a separate legal entity, which is your company. Find
out more about setting up a company.

Advantages of a limited company

The main advantage of setting up a limited company is that its finances are separate
from yours. This reduces your personal exposure to financial risk, so if the business
fails (or is sued) then you are liable only for the face value of your share in the
business.

Another big advantage is the tax regime: companies pay corporation tax at 19 per cent
on their profits. This can be significantly more tax-efficient than paying income tax on
income, especially for higher-rate taxpayers (though as a director you will still have to
find a way to take income from the company, such as salary or dividends, which will
be taxed accordingly).

Disadvantages of a limited company

One downside is that a limited company involves much more administration. You are
likely to need a company secretary and very probably an accountant too (though you
can outsource both of these roles). You must submit an annual company tax return and
full statutory accounts to HMRC, and are responsible for paying employees’ income
tax and NI contributions too.

Summary: Good for the maturing business that is ready to trade agility for greater
stability.

Contractors - your own company, or an umbrella

company?
If you are a contractor, you will most likely want to set up a limited company of one
person, or else join an umbrella company. Sole trader contractors are rare, as clients
and agencies face the issue of whether or not the contractor counts as an employee for
legal purposes.

Limited liability partnership

A limited liability partnership (LLP) is a popular structure for professional services
such as accountancy and legal firms. In most respects they are similar to ordinary
partnerships (see above) but as the name implies they have limited liability (like a
limited company). An LLP must be registered at Companies House, and at least two
partners must be ‘designated members’ who take responsibility for filing the annual
accounts.

Advantages of an LLP
As with an ordinary partnership, each partner in an LLP registers as self-employed
and submits a separate tax return. But if the business fails, each partner is only liable
for the face value of his or her share.

Disadvantages of an LLP
The administrative burden of an LLP is similar to that of a limited company, so
an accountant and company secretary may be desirable (though not required by law).

Summary: A sensible step for partnerships above a certain size.

Comparing different business

structures
Here you can compare the different business structures side by side and see the main
strengths and weaknesses of each.

Sole trader Company Partnership LLP

Easy to set up? *** * ** *

Easy to run? *** * ** *

Tax efficiency * *** * **

Personal protection * *** * ***

Scalability * *** ** ***

Ask your accountant about the most suitable structure for your business at its current
stage of development.

If you found this article useful, you might also find our article on buying out a
business partner informative, too.