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Which Business Structure should you use?

Choosing the right business structure is an important step for any business – and one that will determine your tax obligations, legal liability and opportunities for growth.

Whilst you should make every effort to select the appropriate business structure, it is possible to change between them, should your circumstances change.

We will outline the most common structures and their pros and cons below.

Sole Trader

This is the simplest form of business and, for this reason, most people set up as a sole trader when first starting out. As a sole trader, you work for yourself and are self-employed. Sole traders are required to submit a self-assessment tax return.

From 6 April 2026 sole traders with a turnover exceeding £50,000 for the year will also have to comply with MTD and make quarterly submissions to HMRC.

Sole trader businesses have ‘unlimited liability’ which means owners are personally responsible for all of the debts of the business.

Choose sole trader for ease of set-up and to retain full control of your business. But be aware that you will be personally liable for any business debt.

Partnership

In a partnership, two or more people are responsible for a business. Partnerships can also be formed between companies, or between an individual and a company.

All partners are jointly responsible for any business debts and each partner must submit a self-assessment tax return along with the partnership tax return.

It is also advisable to have a partnership agreement to document the business arrangements between the partners, including how profits will be shared and how partners will join and leave the partnership. Even a husband and wife partnership should have a written partnership agreement.

Choose partnership if two or more individuals wish to share management and profits. But be aware that all partners are jointly (if not always equally) responsible for any business debt.

Limited Company

Unlike sole traders and partnerships, a limited company is a separate legal entity from its owners – the business is owned by the limited company, not you.

Limited companies are often more tax efficient for higher earners and offer limited liability for any business debts. However, they are also subject to stricter regulations and compliance. Limited companies must file annual accounts at Companies House and pay taxes on any profits via a corporation tax return.

Choose limited company for limited liability, better borrowing potential, significant tax advantages or if you plan to scale quickly. But be prepared for more rigorous regulatory compliance and higher accountancy costs.  

Limited Liability Partnership (LLP)

LLP’s are treated like a normal partnership for tax purposes but the members of the partnership have the protection of Limited Liability.

A LLP is a separate legal entity and can enter into contracts and deeds, sue and be sued in its own name. With normal partnerships every partner has to be party to certain documents and litigation.

Floating charges can be granted over its assets in its own name, which normal partnerships can’t do. As with Limited Companies, the LLP must file annual accounts at Companies House together with certain other information.

The best business structures are those that are as flexible as possible. A new business that is likely to make losses in the first few years could start as a partnership or sole-trader to make the best use of those losses. There may be commercial pressures to operate as a limited company in certain sectors. It is possible to split a business into two; one part running as a limited company and one as a sole trader/partnership to get the best of both structures. However the VAT implications of such a split must be considered carefully. You can even structure the business as a partnership but with one of the partners being a limited company.

How we can help

We can assist in advising on the most appropriate business structure for you, giving consideration to both commercial and tax issues. Please get in touch for more information.