What is a business structure?
A business structure, sometimes called a 'business entity' or 'legal structure', is the legal framework that determines how a business is organised and operates. It defines the business as a legal entity and separates it (or doesn't) from the people who own and run it. Your choice of structure has significant implications for personal liability, tax obligations, administrative requirements, and your ability to secure investment. The four most common ways to set up a business in the UK are as a sole trader, in partnership with others, as a limited liability partnership (LLP), and as a private limited company.
What are the main types of business structures?
There are several ways to structure your business, but most new businesses will choose one of four main types. Each has its own benefits and drawbacks depending on your situation.
Sole trader
Being a sole trader is the simplest way to start a business. You run the business as an individual and are personally responsible for all its debts. There's no legal distinction between you and your business, which means all the profits are yours, but so are all the liabilities. Setting up is straightforward – you just need to register for Self Assessment tax with HMRC. For more information, read Setting up as a sole trader.
Partnership
A partnership is similar to a sole trader structure but involves two or more people (or companies) running a business together. The partners share the profits, and each partner is personally responsible for the partnership's debts. This is known as ‘joint and several liability’. It’s crucial to have a solid legal agreement in place.
You can set out the rules for how your partnership is run, how profits are shared, and what happens if a partner leaves by making a Partnership agreement.
For more information about partnerships, read Setting up a partnership and Running a business partnership.
Limited liability partnership (LLP)
An LLP is a hybrid structure, combining elements of a partnership and a limited company. In an LLP, the members (partners) aren't personally liable for the business's debts; their liability is limited to the amount they invest. LLPs are common amongst professional service firms, like solicitors and accountants. They must be registered at Companies House and have at least two ‘designated members’ responsible for filing accounts.
If you’re setting up an LLP, you should make an LLP agreement.
For more information about LLPs, read Types of partnership, Setting up a partnership, and Running a business partnership.
Limited company
Setting up a limited company creates a distinct legal entity that is separate from its owners (the shareholders or members). This is the most significant feature, as it means the company's finances are separate from your personal finances. This is known as ‘limited liability’. The company is owned by shareholders and run by directors (who can be the same people). A limited company must be incorporated at Companies House and has more complex reporting and administrative requirements than a sole trader setup.
For more detailed information, read How to register a company in five steps and Private limited companies.
How do I choose the right structure for my business?
The best structure for you depends entirely on your personal circumstances and business goals. There's no one-size-fits-all answer, so you should carefully consider a few key factors before deciding. Answering the questions below can help you figure out which structure is the best fit for your situation.
Ask yourself:
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am I going into business alone or with others? If you're on your own, a sole trader is the simplest option. If you're working with others, you'll need a partnership, LLP, or limited company
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how much personal financial risk can I accept? If you want to protect your personal assets (like your home) from business debts, a limited company or LLP is the safest choice due to its 'limited liability'. As a sole trader or traditional partner, you're personally responsible for all business debts
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what kind of image do I want to project? A limited company can sometimes appear more credible or established to clients, suppliers, and banks
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do I plan to seek investment or external funding in the future? If you want to bring on board angel investors or venture capitalists by selling shares in your business, you must be a limited company. This structure is also often preferred by banks for larger business loans, as it provides a clear legal distinction between your personal and business finances. While many business grants are available to all structures, some larger or more specialised grants are targeted specifically at incorporated companies, and having a formal structure can make any funding application appear more robust
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how much admin am I willing to do? Being a sole trader involves the least amount of paperwork. Limited companies have more complex accounting and reporting requirements, including filing annual accounts and a confirmation statement with Companies House
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how important is privacy? The details of limited companies and LLPs, including the names of directors and significant shareholders, are published on the public record at Companies House. Sole traders have more privacy
Can I change my business structure later on?
Yes, it’s possible to change your business structure as it grows and evolves. A common path is for a successful sole trader to incorporate as a limited company to protect their personal assets through limited liability or for tax purposes. Changing from a sole trader to a limited company, for example, involves setting up a new limited company and transferring the assets of the old business to it. While it is possible to change, it involves administration and can have tax implications, so it’s always best to get advice before making a switch.
If you're starting a business with others, it's vital to make a Partnership agreement, LLP agreement, or Founders agreement. If you're ready to form a company, you will need a Shareholders' agreement and Articles of association. You can also use our Business registration service to set up your business with the help of a Legal Pro.
Do not hesitate to Ask a lawyer if you have any questions or need help deciding which structure is right for you.
