Starting a business is an exciting time, but it requires considerable research and meticulous planning to give yourself the best chance of success. One of the first practicalities that you will need to consider is how to structure your startup. In the UK, there are four types of business structures that you can use:
- Sole trader
- General partnership
- Limited company
- Limited liability partnership (LLP)
We provide a brief overview of each one below, including the taxes you will pay, your liability for business debts, and how to register your chosen structure.
Sole trader
The sole trader model is the simplest and easiest type of business structure to set up and operate. If you register as a sole trader, you will be a self-employed individual who owns and runs the entire business. However, you can still employ other people to work for you.
Any profit you make will be liable to Income Tax, in addition to Class 4 National Insurance contributions (NIC). You will report and pay tax on your sole trader earnings through Self Assessment after the end of each tax year.
You must also register for VAT if your business turnover is more than £90,000. If it is less than that, you can register voluntarily. Doing so may be beneficial if, for example, you buy goods or services from other VAT-registered businesses.
As a sole trader, you have unlimited liability. This means that you are personally responsible for all business debts, contractual obligations, legal claims, and any losses.
How to set up as a sole trader
It is quick and easy to set up as a sole trader in the UK. You simply need to register for Self Assessment with HMRC. The deadline is 5 October after the tax year in which you start trading. The current tax year is 6 April 2024 to 5 April 2025.
To register, you will need to create a Government Gateway user ID and password. HMRC will then send you a Unique Taxpayer Reference (UTR) by post within 10 working days. This is used to identify you for tax purposes.
After the end of each tax year, you must complete a Self Assessment tax return for HMRC and pay any tax and NIC that you owe on your sole trader profits.
General partnership
A general partnership is a traditional (‘ordinary’) business partnership consisting of two or more people (partners), who jointly own and operate the business.
Each partner is registered as self-employed and pays Income Tax and NIC through Self Assessment on their share of the profits. They also have unlimited liability, which means that every partner is personally responsible for all business debts, contractual obligations, legal claims, and any losses.
You can employ other people to work for your business. It is also possible for a corporate body (e.g. a limited company) to be a partner in a general business partnership.
How to set up a general partnership
To set up a general business partnership, you will need to register the partnership for Self Assessment with HMRC. Each partner must also register individually for Self Assessment.
After the end of every tax year, you must send a partnership tax return to HMRC. Additionally, each partner must complete their own Self Assessment tax return to report and pay personal tax on their share of the profits.
You will need to register for VAT if the partnership’s turnover is more than £90,000, or you can register the business voluntarily if it is beneficial to do so.
Limited company
Companies can be limited by shares or limited by guarantee. The former is normally used by profit-making businesses, whilst the latter is more commonly used by charities and ‘not for profit’ ventures.
Limited by shares companies are owned by one or more people known as shareholders, and they are managed by one or more people known as directors. Limited by guarantee companies have one or more guarantors (rather than shareholders), and they are managed by one or more directors.
A limited company differs from the sole trader and general partnership structures because it is incorporated (registered) as a ‘legal person’ in its own right. This means that it has its own legal personality, entirely separate from the people who own and run it.
Consequently, the shareholders or guarantors (aka ‘members’) are not personally liable for the company’s debts, contractual obligations, or legal claims. They have what is known as ‘limited liability’, meaning that the extent of their liability is limited to the amount of money that they:
- agree to pay for their shares (if the company is limited by shares)
- provide as a guarantee (if the company is limited by guarantee)
You can be a sole member (shareholder or guarantor) and director of either type of company, or you can set up and run the business with other people. It is a very flexible business structure. You can employ staff to work for the company as well.
Companies pay Corporation Tax on the profits that they make. You can take a director’s salary, on which you will pay Income Tax and NIC. As a shareholder, you can also pay yourself dividends, which attract a lower rate of personal tax.
Again, depending on business turnover, VAT registration may be compulsory or voluntary.
How to set up a limited company
Setting up a limited company in the UK is a quick and easy process if you register online through a company formation agent like Rapid Formations.
You will need to complete a simple online application form, providing a unique company name, a registered office address, and information about the person or people who will own and manage the company.
Your application must be submitted to Companies House (the UK registrar of companies) for approval. Typically, this takes only a few hours, after which time your company will be ready to start trading.
You will need to register the company with HMRC for business taxes. Directors and shareholders must register separately for Self Assessment.
Companies have more administrative obligations than sole traders and general partnerships, including keeping statutory company registers, filing confirmation statements and annual accounts, and maintaining certain details on the public register at Companies House.
Limited liability partnership (LLP)
A limited liability partnership (LLP) is a unique business structure that combines the key characteristics of a general partnership and a limited company.
It is incorporated as a legal person, separate from the members (partners) who own and manage the business. Each member is self-employed and pays Income Tax and NIC on their share of the profits, but they also enjoy limited liability for the LLP’s debts, contractual obligations, and legal claims.
An LLP is ideal if you want to run a profit-making business as a partnership, whilst protecting your personal assets.
How to set up an LLP
Just like companies, limited liability partnerships must be incorporated at Companies House. The easiest way to do this is to complete an online application through a company formation agent.
You will need to provide a unique LLP name, a registered office address, and information about the two or more members who will own and manage the partnership.
Companies House approves most applications within a few hours. You will then need to register the LLP for Self Assessment (and VAT, if applicable). Each member must also register separately for Self Assessment and send a tax return each year to report their share of the profits and pay personal tax.
You will be required to keep statutory LLP registers, file a confirmation statement and annual accounts, and maintain certain details on the public register at Companies House.
Wrapping up
The type of business structure that you choose for your startup will determine the tax that you pay, your personal liability for debts and obligations, your administrative responsibilities, and the way in which your business operates and grows.
It is possible to change business structures at any time, but transferring assets can be an arduous process. Therefore, it is best to take your time and try to choose the one that best suits your long-term business plans.
We hope that you have found this post useful. Please comment below if you have any questions, or get in touch with our company formation team if would like to set up a company or LLP online.
