Limited Company, Sole Trader or Partnership?
A Guide to Business Structures
The type of business structure that you decide to use will depend on a number of factors, including how many employees there are in the business, how many shareholders the business has, how much money the business expects to make, and what you want to do with the business profits.
Small businesses usually have one of the following trading structures:
- Sole trader
- Partnership
- Limited company
- Limited Liability Partnership (LLP)
We are always happy to offer advice on the best business structure to choose.
Sole Trader
This is the simplest route if you are the only owner of the business. However there are certain obligations you must fulfil with HMRC, and tax obligations you must meet. As a sole trader you keep all profits after tax, but you are also personally responsible for any losses your business might make. There is no distinction between you and your business, so you bear all legal and financial responsibility.
Partnership
In a partnership, you and your partner (or partners) personally share responsibility for your business. This includes any losses your business makes, and bills for things you buy for your business, like stock or equipment. Partners share the business’s profits, and each partner pays tax on their share.
A partner does not have to be an actual person. For example, a limited company counts as a ‘legal person’ and can also be a partner.
Limited Company
Setting up a limited company requires more administration than registering as a sole trader, but can be less of a risk in the long term. A limited company is a separate legal entity to its directors, which means that the company is responsible for everything that it does, separately to you as an individual. Any profits belong to the company, rather than you, so you are paid as an employee.
The company can share its profit, after tax, amongst its shareholders as dividends. The director(s) are responsible for running the company and usually own shares, but are not personally responsible for any losses the business may make.
Setting up a limited company enables you to plan your business finances separately from your own personal finances and protect your personal assets.
Limited Liability Partnership (LLP)
Like a limited company, an LLP is incorporated at Companies House and has the same rigorous filing and reporting requirements. It is also similar to a limited company in that the partners of an LLP have reduced financial responsibility (unlike a traditional partnership), making this an appealing option for many small businesses.
A partnership must consist of two or more partners and have at least two partners designated to assume additional legal responsibilities on behalf of the LLP.
LLPs tend to be suitable for a partnership with a small, constant number of members who all make comparable contributions to the company and take home a similar level of profit, such as solicitors and accountancy firms. However, if you wish to sell shares in your business or plan to employ lots of people whose total salaries will be higher than the owners’, a limited company may be more suitable.