Choosing a Business Structure or Entity
The choice of structure or entity will be determined by the individual requirements those setting up the business.
The types which are commonly used are: limited company, partnership, limited liability partnership and a sole trader. Some of those above (for example, soletraders and partnerships) have some similarities, whist others such as limited companies have some very distinct features.
Strong consideration should be given to the choice of business structure or entity. Although it can be changed at a later date, selecting the right one from the outset can result in less disruption once trading has started. Using the services and advice of an accountant might be advisable at this stage.
The Four Main UK Business Structures
| Structure | Owners | Liability | Best for |
|---|---|---|---|
| Sole trader | 1 person | Unlimited — personal assets at risk | Simplest, cheapest start; low-risk trades |
| Partnership | 2+ people | Unlimited, shared between partners | Two or more people starting together without incorporating |
| Limited liability partnership (LLP) | 2+ members | Limited to what each member invests | Professional partnerships (solicitors, accountants) wanting liability protection |
| Limited company | 1+ shareholders | Limited — company is a separate legal entity | Businesses wanting liability protection, credibility, or planning to raise investment |
Considerations for Selecting a Business Structure
Ease of starting up. Traditionally commentators have always suggested the setting up a business as a sole trader was by far the easiest structure to adopt. However, with the widespread growth of electronic company formations, the gap in terms of simplicity has certainly been closed — a limited company can now be incorporated online in around 24 hours for £50.
Many would still suggest that starting business as a sole trader is the most straight-forward, requiring only notification to HMRC and maintaining basic books to record business transactions, plus the preparation of an annual tax return (which some may already do through their employment).
Liability. This is often the single biggest factor. A sole trader or ordinary partnership has unlimited personal liability — if the business can't pay its debts, personal assets are at risk. An LLP or limited company separates the business's liabilities from the owners' personal finances, at the cost of more administration (annual accounts, Companies House filings).
Tax treatment. Sole traders and partners pay Income Tax and National Insurance on profits via Self Assessment. Limited companies pay Corporation Tax on profits, and directors then pay Income Tax/NI on any salary and Dividend Tax on dividends — a structure that can be more tax-efficient once profits grow, but adds complexity.
The right structure depends on your specific circumstances — risk profile, growth plans, and tax position all matter. See our full comparison of sole trader vs limited company for the detail behind the two most common choices, or speak to an accountant before committing, since changing structure later is possible but adds cost and disruption.