Skip to main content

How do I choose a legal structure for my business?

Sole trader, limited company or partnership? This article gives an overview of some of the different legal structures available to the small business owner and how to go about choosing the right legal structure for your business.

What are the main differences?

Different business structures have different responsibilities. We take a look at some of the differences here:

  • Income

    Sole traders and partners in partnerships pay income tax on the profits they have made. They will assessed on an ‘accounting period’ basis which can be 6 April to 5 April, i.e. each year accounts are prepared for the year ended 5 April but they don’t have to be. Directors in companies are likely to extract funds in a variety of ways. They may be paid a salary through the company and receive other taxable benefits. However, they are likely to take the bulk of their income as dividends if they are also shareholders. This will be paid out of the profits that remain after the company has paid Corporation Tax.

  • Tax

    Individuals, regardless of structure, will pay income tax. Sole traders must send a Self Assessment tax return every year, pay Income Tax on the profits a business makes and pay National Insurance. With a company, the company would also have a corporation tax liability (and other reporting deadlines) usually payable nine months and one day after the accounting period has ended.

  • Risk (liability)

    Sole traders and partners have unlimited liability, i.e. they are personally responsible for the debt of the business. Shareholders in companies have limited liability; their loss is usually restricted to the amount paid for their shares. There is a further option available to partnerships known as limited liability partnerships (LLPs). This is similar to an ordinary business partnership, but the liability is limited to the amount of money the business partners have invested or agree to invest in the business. LLPs tend to be solicitors, architects, medical practitioners etc. 

  • Responsibilities (paperwork, returns etc)

    Sole traders and partners have a responsibility to pay their tax and national insurance through Self Assessment. The partnership itself will have other obligations in relation to the partnership accounts. 

  • Additional obligations

    Companies have additional obligations in terms of filing accounts, keeping memorandum and articles of association, vouching dividends, paying Corporation Tax, filing P11Ds. A lot of this work is complex and many businesses will work with professional firms on this.

How should I choose?

Choosing a legal structure will be dependent on the kind of business you have (or plan to have) and there are pros and cons with any business structure. 

It is recommended you speak to a professional accountant or tax advisor to ensure that you have the most appropriate legal structure to operate your business. 

End of Article
Share this content

Register with Informi today:

  • Join over 20,000 like-minded business professionals
  • Create your own personalised account with curated reading lists and checklists
  • Access exclusive resources including business plans, templates, and tax calculators
  • Receive the latest business advice and insights from Informi
  • Join in the discussion through the comments section

or

I’ve been working through the how to start a business in 20 days ebook and so many of the things I’d done are now nicely tied together and some gaps now filled. I love the simplicity. Thank you.

Sarah Gosling – Gosling Charity Consulting

I love receiving my Informi emails. They’re always well written and engaging.

Jennifer Hobson – JEH Bookkeeping