Choosing a Business Structure
When starting a business, choosing the right structure is essential, as it affects how your business operates, pays taxes, and your exposure to personal liability.
In the UK, the four most common business structures are:
- Sole Trader
- Partnership
- Limited Company (Ltd)
- Limited Liability Partnership (LLP)
Each option comes with its own legal, financial, and operational implications. Here’s a quick overview of each structure, its advantages and disadvantages, and how they compare.
Contents
Sole Trader
A sole trader is the simplest and most common business structure. As a sole trader, there is no separation of legal identity between the business and the owner (you are the business).
| Advantages | Disadvantages |
|---|---|
| Ease of setup: Minimal paperwork and no need to register with Companies House. | Unlimited liability: You are personally liable for covering any business debts. |
| Simpler profit extraction: Tax is due on profits as they arise, with no additional tax on withdrawals. | Tax on all profits: Sole traders are taxed on all profits as they arise, even those retained in the business. |
| Lower running costs: Fewer ongoing compliance obligations and lower administrative expenses. | Higher tax rates: Profits are subject to higher rates of income tax (and NICs) when compared to a limited company. |
| Control: You make all decisions without the need to consult shareholders/other owners. | Succession: Passing on parts of a sole trader business can be more complicated than transferring shares in a company. |
| No profit sharing: You retain all business profits (after tax). | Limited staff incentives: Sole traders cannot offer share schemes to employees. |
| Privacy: The business’ accounts are not publicly available. | Credibility: Limited companies are often perceived as more established and credible by clients and investors. |
Summary: For small, low-risk businesses and startups looking for simplicity.
Partnership
A partnership is similar to being a sole trader but involves two or more individuals sharing ownership of the business. A partnership agreement should be drafted from the outset, typically defining roles, responsibilities, and profit sharing.
| Advantages | Disadvantages |
|---|---|
| Ease of setup: More complicated than a sole trader but still relatively simple and inexpensive to establish. | Joint liability: All partners are jointly and severally liable for business debts and legal claims. |
| Shared responsibility: Partners can split workload, risks, and decision-making. | Risk of disputes: Differences in opinions or management styles can lead to conflicts. |
| Flexibility: Roles, responsibilities, and profit-sharing can be tailored via a partnership agreement. | Tax on all profits: Partners are taxed on their share of all profits, even if retained in the business. |
| No formal filing: Unlike companies or LLPs, there is no need to register with Companies House. | Higher tax rates: Profits are subject to higher rates of income tax (and NICs) when compared to a limited company. |
| Privacy: Partnership accounts are not publicly available. | Succession challenges: Transferring ownership is likely more complex compared to a company. |
Summary: A practical and flexible option for businesses with trusted partners.
Limited Company (Ltd)
A limited company is a separate legal entity from its owners, offering greater protection for personal assets. The business must be registered at Companies House.
| Advantages | Disadvantages |
|---|---|
| Limited liability: Owners' personal assets are protected from business debts. | Complex setup: Requires registration with Companies House and ongoing compliance. |
| Tax efficiency: Profits are taxed at corporation tax rates, often lower than personal income tax. | Increased administration: Annual accounts, tax returns, and other regular filings are required. |
| Credibility: Often seen as more professional and trustworthy by clients, suppliers, and investors. | Tax on profit extraction: Corporation tax is paid on company profits as they arise, and additional personal tax may apply when withdrawing these profits from the company. |
| Flexible profit extraction: Shareholders can optimise tax efficiency by extracting profits as dividends, salaries, benefits etc. | Higher costs: Professional help is often needed to manage ongoing compliance and filings. |
| Easier to scale: Raising capital is simpler as shares can be sold to investors. | Public records: Directors' details and company information, including financial accounts, are available to the public. |
Summary: A scalable and tax-efficient structure for businesses looking for legal protection and greater stability.
Limited Liability Partnership (LLP)
An LLP combines the benefits of a partnership with the limited liability of a company. Commonly used by professional services firms, LLPs must also register with Companies House.
| Advantages | Disadvantages |
|---|---|
| Limited liability: Members’ personal assets are protected from business debts. | Increased administration: Similar to limited companies, annual accounts and filings are required. |
| Simpler profit extraction: Tax is settled on each member’s profit share as it arises. | Tax on all profits: Members are taxed on their share of all profits, even if retained in the business. |
| Flexibility: Roles, responsibilities, and profit-sharing can be tailored via an LLP agreement. | Higher costs: Setup and ongoing compliance costs are higher than standard partnerships. |
| Shared expertise: Combines members’ skills and resources for better decision-making. | Designated members: At least two members must take on legal responsibilities for compliance. |
| Continuity and stability: The departure or death of a member does not necessarily dissolve the LLP. | Public records: As with companies, LLPs must register with Companies House and submit documents to the public register. |
Summary: Ideal for partnerships that require legal protection and a more formal structure.
What Should You Do?
Choosing the right structure depends on your business goals, financial situation, and risk appetite. Sole traders and partnerships offer simplicity, while limited companies and LLPs provide greater scalability and protection.
If you’re unsure which option is right for you, speak to your accountant. At Veritas ATS, we provide expert guidance to help you make informed decisions that support your business ambitions.
Get in Touch
For more information on choosing the right business structure, contact us today to arrange a free initial consultation.
This article provides general information and should not be considered professional advice. It reflects legislation and practices at the time of writing, which may change. Individual circumstances vary, so please consult us before taking any action. We accept no responsibility for financial loss arising from actions taken without our written advice.
Liam O'Riordan
As Principal at Veritas ATS, I help start-ups, owner-managed businesses, and individuals simplify accounting and tax, providing clear, practical solutions tailored to their needs.
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