Starting your own business is a big step, and one of the first decisions you’ll need to make is how to structure it. The choice you make will affect everything from tax and paperwork to liability and decision-making.
There’s no one-size-fits-all answer. It depends on your goals, whether you’re starting alone or with others, and what kind of protection or flexibility you’re looking for. In this article, we explore four of the most common business structures used in the UK, along with what each might mean for you.
Sole Trader – The Simple Start
Becoming a sole trader is the easiest way to start a business. You’ll have complete control and keep all profits (after tax), but you’ll also carry all the financial risk personally. There’s no legal separation between you and the business, so if things go wrong, your personal assets could be at risk.
The upside? There’s less red tape. You’ll need to register with HMRC and file a self-assessment tax return each year, but you won’t need to register at Companies House or publish annual accounts.
Partnership – Going into Business Together
If you’re starting a business with someone else, a partnership could be the way to go. It’s easy to set up and allows you to share profits, responsibilities, and decision-making. However, each partner is personally liable for all the business’s debts, not just their share of the business’s debts.
It’s strongly recommended to have a Partnership Agreement in place to clarify roles, profit-sharing arrangements, and the procedures in the event of someone leaving. Without one, the old Partnership Act 1890 rules will apply, which may not suit modern business needs.
LLP – Partnership with Protection
A Limited Liability Partnership (LLP) offers the flexibility of a partnership but with added protection. Members (partners) aren’t usually personally liable for the business’s debts—liability is limited to their investment in the LLP.
You’ll need to register with Companies House, file accounts, and submit confirmation statements annually. Members are taxed individually on their share of profits, and the LLP itself doesn’t pay corporation tax. It’s a popular structure for professionals such as solicitors, consultants, and accountants.
Limited Company – Separate and Secure
A limited company is a distinct legal entity, separate from its owners (shareholders) and managers (directors). This structure offers the strongest personal asset protection and can help boost credibility with clients and investors.
There is more administration involved. Annual accounts, confirmation statements, and corporation tax returns must all be filed with Companies House and HM Revenue & Customs (HMRC). Directors are typically paid a salary (taxed under PAYE), while dividends are distributed to shareholders. This can lead to “double taxation,” but it also opens up more options for tax planning.
Still Not Sure?
Many business owners start as sole traders or partnerships and switch to an LLP or limited company as they grow. The right choice depends on your current situation and long-term goals. At Pomphreys, we can help you weigh up the options and set up your business in a way that works for you. Contact us today for clear, practical legal advice.
