A guide to UK business structures and how to choose one

Introduction

This guide explains how to choose a business structure when starting a business in the UK. It covers the main setup options: sole trader, general partnership, limited liability partnership (LLP), and limited company. You’ll learn how each structure affects tax, liability, reporting, and control. Whether you're a freelancer, startup founder, or forming a partnership, this guide will help you understand your options and make an informed decision based on your goals and risk profile.

Why choosing the right business structure matters

The UK offers a range of business structures to choose from. Selecting the right one is crucial, as it affects factors such as the level of control you have and your personal financial liability. It can also shape how customers, suppliers, and investors perceive your business.

While it’s important to make an informed decision from the outset, your structure isn’t set in stone. Some businesses do change their structure later on. However, it will be much easier if you choose the right structure from the start.

Sole trader

What is a sole trader?

A sole trader is an individual who runs and owns a business alone, taking full responsibility for its profits and liabilities.

It’s often the most straightforward option for first-time business owners deciding between sole trader vs limited company structure.

What are the main features of a sole trader?

Key features include:

• Quick setup – No need to register with Companies House; just notify HMRC and submit Self Assessment.
• Minimal admin – Few reporting and record-keeping requirements compared to companies.
• No separation – There’s no distinction between you and the business.
• Self-employed – You’re self-employed, but you can still employ staff.
• Simple taxation – You pay Income Tax and National Insurance on any profits.
• Unlimited liability – You are personally responsible for all business debts and obligations. If the business encounters difficulties, your personal assets may be at risk.

Who is the sole tradership structure suitable for?

Sole tradership may be suitable for you if:

• You want as little registration and admin work as possible
• You want privacy by keeping your business’ information off the public record
• You’re comfortable with the risk that comes with unlimited liability
• You work in a very low-risk industry
• You don’t need to raise external funding

Examples include: Freelancers and consultants in very low-risk industries, tutors, and delivery drivers/couriers.

Limited company

What is a limited company?

A limited company is a formal business structure that’s registered at Companies House. It’s owned by its shareholders and run by its directors, although both roles can be carried out by the same person (meaning you can set up a limited company by yourself).

There are different types of limited companies, however, almost all are private companies limited by shares.

What are the main features of a limited company?

Limited companies come with several important features. These are crucial for future business owners to consider when comparing sole traders vs. limited companies.

• Structure – Owned by shareholders and run by directors.
• Legal separation – The company is a separate legal entity from its owners.
• Limited liability – The company is responsible for its own debt. The shareholders’ personal assets are protected.
• Tax – Limited companies pay Corporation Tax on their profits. Owners/directors may take income via a mix of salary and dividends.
• Formal requirements – Company information must be submitted to Companies House, together with regular filings such as confirmation statement and annual accounts.
• Public disclosure – Key company information, including the names of directors and shareholders, as well as financial details, is published online.

Who is a limited company suitable for?

Limited companies are known for being a great fit for businesses of all sizes, from the smallest to the largest multinationals.

They are particularly suitable if:

• You want to reduce your risk by benefiting from limited liability
• You plan on growing or scaling your business
• You plan on bringing other investors/shareholders into the business
• You want a more flexible ownership structure
• You want to present a more formal-looking business
• Your industry expects you to operate as a limited company
• You want to make use of the flexible tax arrangements
• You’re comfortable with additional filing and reporting requirements

Examples include: Freelancers, consultants, startups, ecommerce stores, property management, and more.

General partnership

What is a general partnership?

A general partnership is a simple structure in which two or more people work together, sharing profits, responsibilities, and unlimited personal liability. You can think of it as the multi-person version of a sole trader, as it’s also not registered at Companies House.

What are the main features of a general partnership?

General Partnership features include:

• Shared control – Partners jointly manage the business and split profits.
• No separation – There’s no distinction between the owners and the business.
• Easy registration – Only minimal registration at HMRC is needed.
• Minimal admin – Far fewer reporting and record-keeping requirements compared to more formal structure types.
• Simple tax setup – Profits are taxed as personal income, and each partner files a Self Assessment return.
• Unlimited liability – Partners are personally liable for business debts, including those caused by other partners.

Who is the general partnership structure suitable for?

A general partnership may be right for you if:

• You’re starting a small business with someone you know and trust
• You prefer a simple, low-cost setup with minimal ongoing admin
• You don’t need to raise external investment
• You want privacy by keeping your business information off the public record
• You’re running a low-risk business where personal liability is manageable

Examples include: Small creative partnerships and advisory firms in a low-risk industry.

When deciding between a partnership and a limited company, it's essential to weigh the simplicity of a partnership against the liability protection and flexibility that a limited company, or even a Limited Liability Partnership, can offer.

Limited Liability Partnerships

What is a Limited Liability Partnership?

A Limited Liability Partnership (LLP) is a formal business structure that combines the flexibility of a general partnership with the added protection of limited liability. It’s registered at Companies House and is used by two or more people who want to run a business together.

What are the main features of an LLP?

The main features include:

• Structure – Owned and run by the LLP’s members.
• Legal separation – The LLP is a separate legal entity from its members.
• Limited liability – Members’ personal finances are protected, with their liability limited to what they agree to invest.
• Flexible internal structure – Members share profits and management responsibilities (proportions can be changed).
• Registered with Companies House – LLPs must file annual accounts and a confirmation statement, and submit other business information
• Individual taxation – Members are taxed on their share of profits via Self Assessment.
• Challenges raising investment – Although not impossible, LLPs face challenges raising investment vs limited companies

Who is the LLP structure suitable for?

LLPs may be suitable for you if:

• You want to form a partnership, but with limited liability protection
• You’re OK with keeping your business information publicly available
• You don’t need to issue shares or raise equity investment
• When comparing LLP vs LTD, the right choice often depends on how you plan to manage profits, liability, and investment.

Examples include: Law firms, accountancy practices, and creative studios.

UK business structure: A side-by-side comparison

Here’s a quick comparison between the most common business structures in the UK, to help you decide what’s best for you.

How to choose a business structure

Different structures suit different businesses. Here are some factors to consider when choosing a business structure:

• Risk – How important is protecting your personal assets, and how risky is the industry?
• Growth plans – Will you want to scale, employ staff or attract investors?
• Business size and setup – Are you working alone or with others?
• Privacy – Do you want your business information to be private?
• Tax and income – What’s more important: tax efficiency or simplicity?

If you're unsure, speak to an accountant. Professional advice ensures your structure supports your goals and protects you legally and financially.

Form a limited company or LLP with 1st Formations

Once you’ve chosen the structure that best fits your goals, you’re ready to take the next step. If a limited company or LLP is right for you, 1st Formations can help you register your new business quickly, affordably, and with confidence.