Sole trader
A sole trader business is owned and run by one person. It’s the simplest business structure to set up and generally has the fewest administrative requirements.
As a sole trader:
- you and your business are legally the same entity;
- you keep the business’s profits after paying any tax due;
- you’re personally responsible for the business’s debts; and
- you’ll normally report your business income to HMRC through Self Assessment or, where applicable, Making Tax Digital (MTD) for Income Tax.
Limited company
A limited company is a separate legal entity from its owners. It is owned by shareholders and managed by one or more directors.
A limited company:
- is responsible for its own debts and liabilities;
- generally provides limited liability for its shareholders;
- pays Corporation Tax on its taxable profits; and
- has additional legal and reporting obligations, including filing annual accounts and a confirmation statement with Companies House.
General Partnership
A partnership allows two or more people to own and run a business together.
In an ordinary general partnership:
- the partners share responsibility for running the business;
- each partner usually pays tax on their share of the partnership’s profits;
- the partners are personally responsible for the partnership’s debts; and
- the partnership has its own reporting obligations in addition to the partners’ individual tax responsibilities.
If limiting personal liability is important, you may also wish to consider a limited liability partnership (LLP).
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Income
Sole traders keep the business’s profits after paying any tax due.
Partners share the profits of the partnership according to the partnership agreement.
Directors of limited companies can receive income in different ways, such as a salary or dividends if they are also shareholders. Dividends can only be paid from available profits after the company has met the relevant legal requirements.
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Tax
Sole traders pay Income Tax and, where applicable, National Insurance on their business profits.
Partners each pay Income Tax and, where applicable, National Insurance on their share of the partnership’s profits.
Limited companies pay Corporation Tax on their taxable profits. Directors and employees may pay Income Tax and National Insurance on their earnings, while shareholders may also pay tax on any dividends they receive.
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Personal liability
Sole traders and partners in ordinary partnerships are personally responsible for the business’s debts.
Shareholders in a limited company generally have limited liability, meaning their personal financial risk is usually limited to the amount they have invested or agreed to invest in the company. However, directors still have legal responsibilities and can be personally liable in certain circumstances, such as fraud or wrongful trading.
A limited liability partnership (LLP) combines features of a partnership and a limited company. It is a separate legal entity, and the members generally benefit from limited liability.
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Legal and reporting requirements
Sole traders must keep business records and meet their tax reporting obligations.
Partnerships must maintain appropriate business records, while each partner is responsible for meeting their own tax obligations.
Limited companies have additional legal responsibilities, including keeping statutory records, filing annual accounts and a confirmation statement with Companies House, and meeting their Corporation Tax obligations. Many companies choose to use an accountant to help meet these requirements.
