Choosing the right structure for your business

A sole trader is the simplest and most common structure for new businesses. You run the business as an individual, keeping all profits after tax but accepting all risk.

• Register with HMRC for self-assessment as soon as you start trading.
• No legal distinction between you and the business—personal assets are at risk if debts are incurred.
• Pay income tax and Class 2/4 National Insurance on profits.
• Maintain accurate financial records and submit an annual self-assessment tax return.

A partnership involves two or more individuals (or companies) sharing management, profits and responsibilities. It offers more hands and skills but retains personal liability unless structured as an LLP. 

A written partnership agreement can help clarify both profit splits and exit arrangements. Profits are divided according to the partnership agreement. Each partner pays tax on their share and keeps records, and a nominated partner files a partnership tax return. 

• Choose a partnership name and register with HMRC. 
• The partnership submits self-assessment tax return to HMRC, but does not accrue a tax liability. 
• Each partner registers with HMRC and submits their own self-assessment return. 
• In a standard (general) partnership all partners share unlimited liability for debts. 

An LLP combines partnership flexibility with limited liability protection for its members. It’s popular among professional firms but does come with additional administrative requirements compared to a traditional partnership. 

• Must have at least two publicly stated designated members responsible for filing and compliance.
• Members’ personal assets are protected; they’re only liable up to their capital contribution or an agreed amount.
• Treated as a partnership for tax purposes: profits are distributed and taxed as individual income.
• File annual accounts and an LLP return at Companies House.

A limited company is a separate legal entity, offering strong liability protection and potential tax efficiencies, but also more statutory administrative responsibility. It can be private (Ltd) or public (PLC).  

• Register at Companies House with Memorandum and Articles of Association.
• Directors and shareholders are recorded on the public register.
• Directors are responsible for ensuring company statutory requirements are met.
• Directors are employees of the company and can be paid a salary for their role.
• Shareholders’ liability is limited to unpaid shares or any personal guaranteed amount.
• Company pays Corporation Tax on profits.
• Shareholders pay income tax on Dividends declared from post-tax profits.
• Required to file annual accounts, Confirmation Statement and Corporation Tax return.

Beyond the four main forms, the UK also offers: 

• Community Interest Companies (CICs) for social enterprises
• Cooperatives owned and run by members

These options cater to organisations that do not necessarily operate a trading activity for the purposes of generating a profit for their members, but operate for a wider social/community purpose. 

When deciding which structure is best for your business, the following factors should be considered. 

1. Tax implications and rates.
2. Extent of personal liability you can assume.
3. Funding requirements and ability to attract investors.
4. Administrative burden and ongoing compliance.
5. Long-term growth and exit strategy.