Business structures: Choosing the right option for you

Starting a business is an exciting challenge —but before you take your first steps, it’s crucial to choose the right trading vehicle. Your decision impacts everything from tax and liability to admin and growth potential.
There is no “one-size-fits-all” solution as it depends on your goals, risk appetite, and whether you’re doing it alone or teaming up with others. In their latest blog, Rebecca Lorne provides a quick guide to the four most common UK business structures:

1. Sole Trader
2. Partnership
3. Limited Liability Partnership (LLP)
4. Limited Company

Each comes with pros and cons, and understanding these differences will help you make a more informed choice.

1. Sole trader

This is the most common way to run a business in the UK. This structure is best for individuals starting small, low-risk ventures because:

• they are simple and low-cost to set up as you just register with HMRC;
• you get to make all decisions and keep all the profits, but you are personally liable for debts;
• you are taxed via Self-Assessment on income and National Insurance; and
• there is no need to file accounts with Companies House.

This is often a popular choice for smaller businesses, due to the lack of legal formalities involved in getting set up and the low administrative costs to keep the business running, however it is important to be aware that your personal assets (like your home) are at risk if the business fails.

2. Partnership

A partnership is often a good option if you’re going into business with someone else as it allows two or more people to run a business together and share the profits (and losses). It is a flexible arrangement and can foster greater collaboration between the parties. Key features of partnerships are:

• they are easy to set up, but all partners are jointly and severally liable for debts;
• the profits are shared and taxed individually; and
• there is no Companies House registration required and no requirement to publish accounts.

A Partnership Agreement is strongly advised as this can set out how profits are shared, decisions are made, and what happens if a partner wants to leave, dies, or the partnership is dissolved. It also helps to avoid future disputes as without one you’ll have to rely on the outdated Partnership Act 1890 which applies by default.

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.

3. Limited Liability Partnership (LLP)

An LLP is a hybrid model where the business is a separate legal entity. It 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. Some of the key features of an LLP are:

• it combines partnership flexibility with liability being limited to the amount the partners have invested or agreed to contribute to the LLP;
• the LLP must register with Companies House and file annual accounts and confirmation statements;
• partners (called members) are generally not personally liable for business debt;
• members typically have the right to manage the business and share its profits;
• members are taxed individually and the LLP is not subject to corporation tax; and
• financial information is published online, so there is less privacy unlike for traditional partnerships or sole traders.

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.

4. Limited Company

A limited company is a separate legal entity, distinct from the individuals who own or manage it. This means that a company can enter into contracts, it can own (and dispose of) assets as well as being responsible for its debts. This structure offers the strongest protection for personal assets, as liability is limited to the value of the shares held in the company. It’s often the best option for businesses seeking investment, credibility, or growth.

There are two main roles within a limited company:

1. the shareholders, who own the company; and
2. the directors, who manage the day-to-day running of the business.

The same people often fill both roles in small companies.

Key features of this structure include:

• it is a separate legal entity which provides the strongest personal asset protection;
• you must file accounts and confirmation statements and have at least one director registered at Companies House;
• 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” where the business and its owners are treated as one for tax purposes.

Although this structure involves more administration and compliance, it can also bring credibility and can make raising investment or applying for business finance easier.

So, which structure is right for your business?

There’s no single “correct” answer to this question The right structure depends on your ambitions, risk tolerance, and how you want to run your business. Many businesses start as sole traders or partnerships and later move on to become 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.