Comparing business structures
The structure you choose affects the tax you pay, who controls the business, and what happens to your business debts.
Sole trader
A sole trader is a business owned and run by one person. There are over 3 million sole traders in the UK, making it the most common business type.
As a sole trader you:
- are self-employed
- make all the decisions for your business
- register for self-assessment and complete a self-assessment tax return each year
- keep all the profits your business makes
- can hire people to work for your business
This might suit you if:
- You want a simple set up with minimal reporting requirements
- You want to keep control of the business
- You want to get started right away without doing lots of paperwork
- You are providing services as a freelancer and have no plans to grow
- You want a simple set up with minimal reporting requirements
- You want to keep control of the business
- You want to get started right away without doing lots of paperwork
- You are providing services as a freelancer and have no plans to grow
This will not suit if:
- You’re worried about financial risk and being personally responsible for your business debts
- You want other people to invest in your company
- You want to be able to sell or pass on the business later
- You will be competing for the same work as limited companies - clients may see them as a safer bet
- You’re worried about financial risk and being personally responsible for your business debts
- You want other people to invest in your company
- You want to be able to sell or pass on the business later
- You will be competing for the same work as limited companies - clients may see them as a safer bet
Limited company
A private limited company is an incorporated business type, which means it is a separate legal entity, and you are not personally responsible for the business’s debts. 37% of UK businesses are limited companies.
As a limited company you:
- are employed by the company, and can receive a salary and dividends
- appoint a company director to run the business – this can be you or another shareholder
- register with Companies House and file annual accounts and statements which are published online
- pay Corporation Tax on your profits
- follow strict rules setting out how you must run the company, manage money and keep records
- can hire people to work for your business
This might suit you if:
- You want to protect your personal assets from business debt
- You want others to invest in your company or want to apply for business loans
- You will make enough tax savings from being a limited company to offset the extra admin costs
- You want to protect your personal assets from business debt
- You want others to invest in your company or want to apply for business loans
- You will make enough tax savings from being a limited company to offset the extra admin costs
This will not suit if:
- You want to avoid complex paperwork
- You want to keep your business accounts private
- You do not want to pay for accountancy services and do not have the skills to do your accounts and returns yourself
- You want to avoid complex paperwork
- You want to keep your business accounts private
- You do not want to pay for accountancy services and do not have the skills to do your accounts and returns yourself
Partnership
A business partnership is an agreement owned by 2 or more people who manage the business together and share its profits. Around 6% of UK businesses are partnerships.
As a partnership, you:
- are self-employed
- are jointly responsible for making decisions with your other partners – but should set up a partnership agreement explaining how you will do this
- pay income tax on profits and must register for Self Assessment as an individual and as a partnership
- divide profits between partners with each person paying tax on their share
- can hire people to work for your business
This might suit you if:
- You want to set up a business relationship with other people and want a simpler structure
- You want to keep your business's information and financials private
- You're willing to set up a properly drafted partnership agreement that explains how things will run
- You want to set up a business relationship with other people and want a simpler structure
- You want to keep your business's information and financials private
- You're willing to set up a properly drafted partnership agreement that explains how things will run
This will not suit if:
- You want to set up a business relationship with other people and want a simpler structure
- You want to keep your business's information and financials private
- You're willing to set up a properly drafted partnership agreement that explains how things will run
- You want to set up a business relationship with other people and want a simpler structure
- You want to keep your business's information and financials private
- You're willing to set up a properly drafted partnership agreement that explains how things will run
Types of partnership
There are 3 different types of partnerships, including a Limited Liability Partnership which has similar reporting and liability arrangements as a limited company and is often used by professional service firms.
There are 3 different types of partnerships, including a Limited Liability Partnership which has similar reporting and liability arrangements as a limited company and is often used by professional service firms.
Social enterprise
A social enterprise is a business with a social, community or environmental mission. It is not a legal business structure.
They can be set up as:
- community interest companies (CICs)
- private companies, limited by guarantee
- co-operatives
- private companies, limited by shares (although this is less common)
