One of the first big decisions you’ll face when starting a business is choosing your legal structure. Should you register as a sole trader? Set up a limited company? Or perhaps a partnership?
It’s a decision that affects everything from how much tax you’ll pay to whether your personal assets are protected if things go wrong. But here’s the good news: it’s not as complicated as it seems, and you can always change your mind later.
In this guide, we’ll walk through the main options for UK businesses in plain English, helping you work out which structure makes sense for your situation.
The Four Main Options
In the UK, most small businesses choose between four main structures:
- Sole Trader – You are the business
- Limited Company – The business is a separate legal entity
- Partnership – Two or more people sharing the business
- Limited Liability Partnership (LLP) – Partnership with limited liability
Let’s look at each one in detail.
Sole Trader: Simple and Straightforward
Being a sole trader is the simplest way to run a business in the UK. You’re self-employed, and in the eyes of the law, you and your business are one and the same.
Why Choose Sole Trader?
It’s incredibly simple Just register with HMRC (which takes about 10 minutes online), and you’re good to go. No need to file annual accounts with Companies House or deal with complex paperwork.
You keep everything All profits are yours after tax. No need to worry about dividends, shareholders, or directors’ salaries.
Low running costs Your accounting will be simpler and cheaper. Many sole traders manage their own books using basic software like QuickBooks or even a spreadsheet.
Full control Every decision is yours. No board meetings, no shareholders to answer to – you’re the boss.
The Downsides
Unlimited liability This is the big one. If your business gets into debt or gets sued, your personal assets (including your home) are at risk. You and the business are legally the same thing.
Higher tax on bigger profits As a sole trader, you pay income tax on all your profits at your personal tax rate. Once you’re earning over £30k-50k profit, a limited company often becomes more tax-efficient.
Harder to raise investment Investors typically want shares in a company. As a sole trader, you can’t offer equity, which limits your funding options.
Who It’s Perfect For
Sole trader works brilliantly if you’re:
- Testing a business idea without huge commitment
- Running a low-risk service business (consultancy, tutoring, freelance work)
- Keeping overheads minimal
- Not planning to seek investment
Real example: Sarah runs a freelance graphic design business from home. She has a handful of regular clients and earns around £35,000 a year. The sole trader structure keeps things simple – she files a tax return once a year and doesn’t need an accountant.
Limited Company: Professional and Tax-Efficient
A limited company is a separate legal entity from you personally. You own shares in it, and you can pay yourself through a combination of salary and dividends.
Why Choose Limited Company?
Limited liability protection Your personal assets are protected. If the company gets into financial trouble, you generally only lose what you’ve invested in the company (there are exceptions for fraud or wrongful trading).
Tax efficiency Once you’re making over £30k-50k profit, a limited company often saves you money on tax. You pay 19% corporation tax on profits (25% over £250k), then can take dividends at lower rates than income tax.
Professional image Many larger clients prefer working with limited companies. It looks more established and can help you win bigger contracts.
Easier to raise investment You can sell shares to investors or bring on business partners without restructuring everything.
Better pension contributions Company pension contributions are more tax-efficient and you can put away more money for retirement.
The Downsides
More paperwork You’ll need to file annual accounts with Companies House (which are publicly available), submit a confirmation statement, and keep more detailed records.
Higher accounting costs Most limited companies need an accountant. Expect to pay £500-£2,000 per year, depending on complexity.
Directors’ responsibilities As a director, you have legal duties. You need to act in the company’s best interests, not just your own.
Less flexibility You can’t just take money out whenever you want. Everything needs to be properly documented and run through the company books.
Who It’s Perfect For
Limited company makes sense if you’re:
- Planning to grow significantly
- Making over £30k-50k profit
- In a higher-risk industry where liability protection matters
- Seeking investment or planning to sell the business eventually
- Working with corporate clients who prefer limited companies
Real example: James runs a software development agency with three employees. He makes around £80,000 profit per year. The limited company structure protects his personal assets and saves him thousands in tax compared to sole trader. His accountant costs £1,200/year but the tax savings far exceed that.
Partnership: Splitting the Load
A partnership is essentially like being a sole trader, but with two or more people sharing the profits, losses, and responsibilities.
The Key Points
- Each partner is personally liable for business debts
- Profits and losses are split according to your partnership agreement
- Each partner pays tax on their share of the profits
- You must have a formal partnership agreement to avoid disputes
Who It’s Perfect For
Partnerships work well when:
- Two or more people want to run a business together
- You want to keep things relatively simple
- You absolutely trust your partners (because you’re all personally liable for debts)
Real example: Mike and Tom run a plumbing business together. They’re both experienced tradespeople and split profits 50/50. A partnership agreement sets out what happens if one wants to leave or if they disagree on major decisions.
Warning: Never enter a partnership without a proper partnership agreement. We’ve seen too many friendships ruined by business disputes that could have been avoided with clear documentation.
Limited Liability Partnership (LLP): Partnership with Protection
An LLP combines the flexibility of a partnership with the liability protection of a limited company. It’s popular with professional services firms like solicitors, accountants, and consultants.
The Key Points
- Partners have limited liability (personal assets protected)
- More expensive to set up and maintain than a standard partnership
- Must file accounts with Companies House
- Each member still pays tax on their profit share
Who It’s Perfect For
LLPs are ideal for:
- Professional services firms (law, accounting, consulting)
- Businesses where partners want liability protection
- Larger partnerships with multiple members
Making Your Decision: A Practical Framework
Still not sure? Here’s a simple decision framework:
If You’re Just Starting Out
→ Start as a sole trader
It’s simple, cheap, and gets you up and running quickly. You can always switch to a limited company later when it makes financial sense.
If You’re Making Under £20k Profit
→ Stay sole trader
The admin and accounting costs of a limited company aren’t worth it at this level.
If You’re Making £20k-£50k Profit
→ Get advice
This is the grey zone where it could go either way. Run the numbers with an accountant – the tax savings might justify switching to a limited company.
If You’re Making Over £50k Profit
→ Probably limited company
The tax efficiency usually makes this worthwhile. You’ll save more in tax than you’ll pay in extra accounting fees.
If You’re in a High-Risk Industry
→ Limited company for protection
If there’s a decent chance your business could face legal action or significant debts, protecting your personal assets is crucial.
If You’re Seeking Investment
→ Definitely limited company
Investors need shares. There’s no way around this one.
The Bottom Line
Here’s what you need to remember:
You’re not locked in forever. Most businesses start as sole traders and switch to limited companies as they grow. It’s a normal progression.
Get professional advice. A good accountant can save you far more in tax than they cost in fees. They’ll help you work out the right structure for your specific situation.
Think about your future, not just today. Where do you see the business in 2-3 years? Sometimes it’s worth setting up as a limited company from the start if you know you’ll need it soon.
Don’t overthink it. If you’re just starting out and unsure, go with sole trader. You can always change later. The most important thing is actually starting your business, not spending months agonising over the perfect structure.
Next Steps
Ready to make your choice? Here are the official resources you’ll need:
- Register as a sole trader with HMRC
- Register a limited company with Companies House
- Learn more about working for yourself on GOV.UK
And if you’re putting together a business plan (especially if you need funding), make sure you’ve got your legal structure sorted first – it affects your financial projections and funding options.
Good luck with your new business!