Welcome to our guide on the different types of business structures available for self-employed individuals and entrepreneurs. Whether you’re considering starting a sole trader business, forming a limited company, or entering into a partnership, understanding your options is key to making the right decision for your needs. Each structure offers unique advantages and responsibilities, from personal liability and tax obligations to control and profit-sharing. This page will help you navigate the various options and provide you with essential information to set up and manage your business effectively.
Sole Trader
As a sole trader, you operate your own business as an individual and are considered self-employed. This means you’re in control of all aspects of the business, including decision-making and finances.
The key advantages of being a sole trader are:
- Full control: You keep all of your business’s profits after paying tax. You also have complete decision-making power, without the need to consult with other business owners.
- Simplicity: Sole trader businesses are relatively easy to set up and manage, with fewer legal formalities compared to other types of business structures.
- Tax obligations: While you keep all the profits, you’re also responsible for paying tax on them, which includes both Income Tax and National Insurance contributions.
However, being a sole trader also comes with responsibilities:
- Personal liability: You are personally liable for any losses your business makes, meaning your personal assets could be at risk if your business encounters financial difficulties.
- Record-keeping: You must keep accurate and up-to-date records of your business’s sales and expenses.
- Tax returns: As a sole trader, you must file a Self Assessment tax return each year. This includes paying Income Tax and National Insurance on your profits, as well as any additional contributions for National Insurance.
You’ll need to register as a sole trader with HM Revenue & Customs (HMRC) if any of the following apply:
- You earned more than £1,000 from self-employment in a given tax year (for example, between 6 April 2019 and 5 April 2020).
- You need to prove your self-employment status (e.g., to claim Tax-Free Childcare or other benefits).
- You wish to make voluntary Class 2 National Insurance payments to qualify for state benefits like the State Pension.
Additionally, if your business turnover exceeds £85,000, you’ll need to register for VAT.
For further details on how to set up as a sole trader, visit HMRC’s guide.
Limited Company
A limited company is a distinct legal entity separate from its owners, providing several advantages, particularly for businesses that aim to generate profit. There are two types of limited companies:
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Limited by shares:
- Typically profit-driven businesses.
- The company is legally separate from the people who run it, meaning your personal assets are protected from business liabilities.
- Profits are taxed at the company level, and any profits left after tax can be reinvested or distributed among shareholders.
- The company has shareholders who own the business and may receive dividends from profits.
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Limited by guarantee:
- Often used by non-profit organizations.
- The company is legally separate from its members, and any profits made are reinvested to support the business’s mission.
- This structure is commonly used for charitable or membership-based organizations, where members (guarantors) contribute to the company’s operation.
Regardless of the type, a limited company requires the establishment of a formal company structure with:
- Legal separation: The company’s finances and legal liabilities are separate from your personal finances.
- Formal registration: You must register with Companies House and comply with company law.
- Corporate taxes: The company will pay tax on its profits, and dividends can be paid to shareholders.
To set up a limited company, visit HMRC’s guide.
Partnership
A partnership involves two or more individuals or entities who share responsibility for running a business. Partners may be people or even other companies. In a partnership:
- Shared liability: Partners share responsibility for any losses or debts the business incurs. This includes financial liabilities and any other legal responsibilities.
- Shared profits: Profits are divided among the partners, and each partner is responsible for paying tax on their share of the income.
- Personal responsibility: Like sole traders, partners are personally liable for business debts unless the partnership is set up as a limited liability partnership (LLP).
When setting up a partnership, you must:
- Choose a name for the business.
- Appoint a ‘nominated partner’ who will be responsible for managing the partnership’s tax affairs, including filing tax returns and keeping accurate business records.
- Register the partnership with HM Revenue & Customs (HMRC).
Partnerships offer flexibility but come with shared responsibility, so it’s crucial to have a clear agreement in place regarding profit-sharing, liabilities, and decision-making.
For more information on setting up a partnership, visit HMRC’s guide.
https://www.gov.uk/set-up-business
