Choosing a business structure is one of the first big decisions you will make, and it affects more than the paperwork. It shapes who is responsible if things go wrong, how much admin you take on, and how you are taxed. Here is how the three most common UK options compare.
This guide is general information, not legal or tax advice. Your best option depends on your circumstances, so talk to an accountant before you decide.
Sole trader
Being a sole trader is the simplest way to start. You and the business are legally the same person.
- Easy to set up: you register with HMRC for Self Assessment and can start trading, under your own name or a business name.
- Light admin: you keep records of income and expenses and file a personal tax return each year.
- The catch: because you and the business are one, you are personally responsible for its debts.
It suits people testing an idea, freelancers, and businesses with little risk.
Limited company
A limited company is a separate legal entity. It owns its assets, earns its income and is responsible for its own debts.
- Limited liability: shareholders are generally not personally liable for the company's debts beyond the money they put in, although there are exceptions such as personal guarantees or wrongdoing.
- More admin: you register with Companies House, keep company records, file annual accounts and a confirmation statement, and pay Corporation Tax. Directors also have legal duties.
- Credibility: some clients and lenders prefer to deal with a limited company.
It suits growing businesses, anyone who wants to separate personal and business finances, and founders planning to hire or raise investment.
Limited liability partnership (LLP)
An LLP blends a partnership with limited liability. It is a separate legal entity, but its members are taxed personally on their share of the profits.
- Shared ownership: it needs at least two members, and an agreement between them sets out how profits and decisions are shared.
- Limited liability: members are generally protected from the LLP's debts beyond what they contribute.
- Registration: like a company, an LLP registers with Companies House and has annual filing requirements.
It is common among professional partnerships, such as law, accountancy and consulting firms.
Questions to help you decide
- How much risk are you taking on? The higher the risk, the more limited liability matters.
- Who are your customers? Some expect to work with a limited company.
- How much admin are you happy to handle? A company needs more upkeep than a sole trader.
- Are you working alone or with partners? Partners may point towards an LLP or a company.
- What are your plans? Hiring, borrowing or seeking investment usually favours a company.
- What is your tax position? This is where advice from an accountant pays for itself.
Can I change later?
Yes. Many people start as a sole trader and incorporate as the business grows. Switching has tax and admin consequences, so plan it with an accountant rather than doing it in a rush.
Not sure which fits? Tell us about your plans and we will point you in the right direction.