Sole trader
This is the most common and simplest form of business structure. This is where you trade on your own on a self-employed basis.
There is no legal distinction between you and your business – you are considered the same entity.
You are in charge of all aspects of your business – you can keep all your business’s profits after you have paid tax on them. You will also be personally responsible for any debts of the business.
You will be liable to income tax on profits and be liable to class 4 and class 2 NIC. You will need to file a self-assessment return every year. Once your takings exceed £85,000 per year you will need to register for VAT.
Limited company
Companies are owned by shareholders and run by directors. They can be limited (usually smaller where shareholders are selected) or public (where shares available for purchase on a stock exchange).
Most limited companies are limited by shares, meaning the shareholders’ responsibilities for the company’s financial liabilities are limited to the value of the shares that they own but haven’t paid for. The shareholders of the company will usually have limited liability for debt of the company i.e. they will not be responsible for the debt personally.
There is more administration in relation to a company – every year a limited company must put together statutory accounts and send an annual return to Companies House and a Company Tax Return to HMRC. A limited company must comply to statutory rules and disclose information to the public.
Partnership
A partnerships is made up of two or more individuals who run a business with a view to making a profit.
Partners in a partnership will pay tax on a self employed basis, and therefore pay tax and be liable to class 4 and class 2 national insurance (in the same way as a sole trader).
There will be a partnership agreement detailing the money invested by each partner and the terms of profit share etc and partnership accounts will be drawn up.
The partners have unlimited liability in the same way as for sole traders, i.e. they are responsible personally for the partnership debt.
-
![]()
Income
Sole traders and partners in partnerships pay income tax on the profits they have made. They will be assessed on an ‘accounting period’ basis: this usually starts from the point you started trading to a date that suits the business. Many choose to end their accounts on 5 April – to match the end of the tax year. 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. Use our interactive tool to calculate your Corporation Tax deadline.
-
![]()
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 accountants on this.
