Every business within the United Kingdom must operate under a specific type of business, either as a sole trader, a limited company, or a partnership.
A sole trader is a self-employed person who is the sole owner of their business. This is the simplest business structure in the UK.
| Registration | No requirement to start trading but must register as self-employed with HMRC if earning over £1,000; must register for VAT if earning over £90,000. You can register for Self Assessment through this link: https://www.gov.uk/register-for-self-assessment. |
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| Tax | Income tax + Capital Gains Tax (as a self-employed person) + VAT. Sole Traders must file a tax return every year. |
| Advantages | Very easy to form with no formalities/registration. Freedom to operate as individual sees fit. Sole decision-maker. All profits belong to the owner. No public records at Companies House. |
| Disadvantages | Unlimited liability for debts and court action. Unable to raise finance easily (cannot issue shares). Lacks the status of a company; only really suitable for very small businesses. |
| What it is | One individual selling goods or services, e.g., a market-stall holder. |
| Incorporated | No, meaning does it does not have a separate legal personality. |
| Personnel | One person owning the business. |
| Liability | Unlimited liability meaning if something goes wrong, that person can be sued personally and would have to pay up if liable. A creditor can also pursue the sole trader individually for debts. |
Learn more: Self-employed or Limited Company.
A limited company is a type of business structure that has its own legal identity, separate from that of its owners (shareholders) and managers (directors). This remains so even when it is run by only one person who is both its shareholder and its director.
A limited company can be more tax efficient than a sole trader since it pays Corporation Tax on its profits at a more lenient tax rate than Income Tax. A limited company may also claim a wider range of allowances and tax-deductible costs than may a sole trader.
There are three main types of limited company in the UK:
Learn more: What is a Limited Company?
The majority of new companies that are formed in the UK are companies limited by shares. This is the standard “Limited” or “Ltd” business structure for any company which has been formed with the intention of generating profit for its owners.
It is remarkably popular because it allows the sharing of profits among the shareholders while also offering restricted financial liability. The shareholders are responsible only for company debts up to the value of the shares which they hold in the company. Their personal assets will therefore be protected should the company encounter financial difficulties.
| Registration | Must register at Companies House + register for VAT if earning over £90,000. Only comes into existence on the date of registration. |
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| Taxes | Corporation tax and VAT applicable, along with other industry-specific taxes, such as business rates if owning retail premises. |
| Advantages | Members (shareholders) have limited liability for debts (only to the amount invested). Offers finance raising options such as issuing shares and fixed/floating charges. |
| Disadvantages | Subject to annual filing obligations (e.g., annual accounts, confirmation statements). Public disclosure of company information on Companies House website. |
| Key Legal Concepts | A company limited by shares is a separate legal entity, capable of owning property, entering into contracts, and borrowing money. Known as a "legal person". |
| Articles of Association | The rulebook of the company containing governance rules, which must align with the Companies Act 2006 and cannot be overridden by other agreements. |
| Roles of Directors and Shareholders | Directors manage day-to-day operations, binding the company by their actions. Shareholders own the company and make critical decisions through resolutions in general meetings, influencing corporate policy and strategy. |
| Executing Documents | Contracts must comply with the Companies Act 2006. Simple contracts may be signed by a director or using the company seal. Deeds require signatures from two directors or a director and a secretary, with witnessing. |
| Liability and Perpetuity | Liability of members is limited to their investment in shares. A company can continue indefinitely, even beyond the lifespans of its original shareholders. |
| Company Structure | May be structured as a group with subsidiaries. This structure provides the benefit of limited liability protection across the business entities, safeguarding each from others' financial risks. |
Learn more: What is a Private Company Limited by Shares?
| Key Legal Concepts | A Private Company Limited by Guarantee is a separate legal entity, with no shareholders but instead has guarantors who commit to contributing a nominal amount during liquidation. |
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| Company Type | Commonly used by non-profit organisations such as clubs, sports associations, community projects, and charities to protect personal finances of the owners. |
| Registration | Must register at Companies House + register for VAT if applicable. The company exists legally from the date of registration. |
| Taxes | Exempt from corporation tax if recognised as a charity. Otherwise, subject to applicable taxes without profit distribution. |
| Advantages | Guarantors have limited financial liability limited to the guarantee amount. Ideal for non-profits, ensuring any surplus funds are reinvested into the organisation. |
| Disadvantages | Unable to raise capital through the sale of shares. Subject to annual filing obligations with public disclosure on Companies House. |
| Profit Distribution | Profits are not distributed among owners but are reinvested to support the organisation's aims. Distributing profits can affect charitable status eligibility. |
| Articles of Association | Governed by Articles of Association that outline the operation of the organisation, aligning with the Companies Act 2006. |
| Roles of Directors and Guarantors | Directors oversee daily operations. Guarantors support the entity's goals and have limited financial commitment. |
| Liability and Perpetuity | Liability of guarantors is limited to their pledged guarantee. The company can operate indefinitely, focusing on long-term objectives. |
A private company limited by guarantee is a type of company that is not very common. It makes up only about 2.5% of all corporate body types in the UK.
Learn more: What is a Private Company Limited by Guarantee?
A public limited company (“PLC” or “plc”) is a type of company commonly associated with companies listed on the stock market whose shares may be freely sold to and traded by the public. This, however, is not a kind of company that we normally help to form.
The LLP structure is often formed by those in industries in which they traditionally work as a partnership, such as a legal practice, an accountancy practice or an architects practice. The primary benefit of an LLP over a traditional partnership is the limited liability protection which it gives its partners, much like a private company that is limited by shares, which means that their personal finances are protected in the event of the firm encountering difficulties.
An LLP is also beneficial in that it allows the partners to remain somewhat separate, with each partner being responsible for paying their own individual income tax via Self-Assessment rather than the business being responsible for paying corporation tax.
The LLP business structure is not very common. Just over 1% of UK businesses are registered as LLPs.
Learn more: Limited Liability Partnerships
Two or more persons who intend to conduct a business together for profit may form a partnership. A traditional partnership is based upon a partnership agreement with no need to register at Companies House.
A general partnership is not a separate legal entity. Its partners generally have unlimited liability, so they are responsible for the debts and losses of the business much like a sole trader, which liability they share. This type of business is mostly associated with professional services such as solicitors, accountants and doctors.
A limited partnership (LP) is a business association which consists of one or more general partners, who are liable for all obligations of the firm, and one or more limited partners. A limited partner contributes a certain amount to the partnership and is liable for the debts or obligations of the business only up to the value of what he-or-she has contributed.
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