One of the first decisions a new business owner needs to make is deciding on which business structure they will trade under.
The structure you select will affect many things, including the amount of tax you need to pay and your level of personal liability for any losses your business makes.
You should carefully consider which business structure is right for you.
Speaking to an accountant can be helpful.
There are three main options to consider.
Sole trader
Partnership
Limited company
Sole trader
Becoming a sole trader is the quickest, easiest, and most common way to become your own boss.
Of the 5.6 million private sector businesses in the UK at the start of 2023, 3.1 million were sole traders.
When you set up as a sole trader, you have limited paperwork to deal with, you can start trading immediately, and you keep all the profits your business makes after tax.
Although sole traders have fewer administrative responsibilities, you do have unlimited liability which means you are personally responsible if your business becomes insolvent or is sued.
If this happens, your personal assets, such as your home or savings, could be at risk.
Sole traders must register with HM Revenue & Customs (HMRC) for Self Assessment and send an annual tax return.
You need to register by 5 October in your business’s second tax year.
If you fail to do this, you may face a financial penalty.
After the standard personal tax allowance, sole traders pay income tax and Class 2 and Class 4 National Insurance contributions.
Guide to setting up a business as a Sole trader.
Partnership
A partnership can be set up when two or more people start a business together.
The simplest partnership structure is a general partnership which is made up of sole traders who jointly share liability for any losses the business makes.
A general partnership needs to be registered with HMRC and an annual partnership tax return must be submitted.
The partnership must be registered by 5 October in the business’s second tax year, or a penalty could be charged.
Each partner also needs to register for Self Assessment with HMRC, submit their own annual tax return, and pay tax on their share of the business’ profits.
Other types of partnerships include limited partnerships and limited liability partnerships.
Guide to partnership business structures.
Limited company
Unlike sole traders and general partnerships, a limited company is a legal entity in its own right.
This means that the shareholders are not wholly responsible for debts incurred by the company, with their liability limited to the shares they hold in it.
A limited company is subject to several more legal requirements than a sole trader.
It needs to be registered with Companies House and is subject to Corporation Tax on its profits.
Although it is more complicated to run a limited company, it can be a more tax-efficient structure because directors and company owners can pay themselves via a PAYE salary and then top this up with shareholder dividends after paying Corporation Tax.
Another advantage is that many people may see limited companies as a more professional operation than an unincorporated sole trader.
Larger businesses may often only do business with incorporated limited companies when working with suppliers, and sole traders may find it harder to access funding.
Read our guide to understanding private limited companies.
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Chapter four: Incorporating your business
Discover the steps you need to take to incorporate your start-up.
Next chapterBritish Business Bank plc is a development bank wholly owned by HM Government. British Business Bank plc and its subsidiaries are not banking institutions and do not operate as such. They are not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). A complete legal structure chart for the group can be found at british-business-bank.co.uk.
Whilst we make reasonable efforts to keep the information in this guide up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.
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