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 are 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 are 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
Business structures and how you pay yourself
Making sense of financial jargon on 56 minutes
Learn how to manage finances, meet legal requirements, and choose the right business structure with confidence.
Partnership
A business partnership is a business 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 are 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 are willing to set up a properly drafted partnership agreement that explains how things will run
This will not suit if:
- You are worried about financial risk and being personally liable for the business's debts
- You want other people to invest in your company
- There is a strong risk of conflict between you and other potential partners
- You are worried about financial risk and being personally liable for the business's debts
- You want other people to invest in your company
- There is a strong risk of conflict between you and other potential partners
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.
Co-operatives and mutuals
Co-operatives and mutuals are businesses that are owned and controlled by their members.
Members may be customers, employees, residents, suppliers or others with a shared interest in the organisation. Decisions are typically made for the benefit of members rather than external shareholders.
They can be set up in different ways, including as a co-operative society or limited company.
This might suit you if:
- You want the people who use, work in, supply or support the business to have a meaningful say in how it is run
- You want members to have a real say in control and decision-making
- You want to share profits among members or reinvest profits for members' benefit
- You want to combine commercial success with benefits for members, communities or other stakeholders
- You want the people who use, work in, supply or support the business to have a meaningful say in how it is run
- You want members to have a real say in control and decision-making
- You want to share profits among members or reinvest profits for members' benefit
- You want to combine commercial success with benefits for members, communities or other stakeholders
This will not suit if:
- You want sole control over the business
- You think decision-making power should be based on who invests the most money
- You need to make major decisions quickly without consulting members
- You do not want members involved in the governance of the business
- You want sole control over the business
- You think decision-making power should be based on who invests the most money
- You need to make major decisions quickly without consulting members
- You do not want members involved in the governance of the business
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)
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