There comes a time when every entrepreneur needs to choose between the different types of business structures in the UK. You might choose to start out as a Sole Trader, incorporate a Limited Company or form a Partnership. In this article, we will explain all the UK business structures as well as the advantages and disadvantages of each so you can choose the best fit for your business.

Sole Trader vs Limited Company vs Partnership

Here is a snapshot of the key differences between the 6 major business structures in the UK.

Sole Trader

What is a sole trader? A sole trader, also known as a sole proprietorship, is a business structure where an individual runs their own business and is personally responsible for its success or failure. It is the simplest and most common form of business ownership, accounting for 56% of all businesses in the UK as of January 2024.

Setting up a Sole Trader Business

It's easy and quick to set up as a sole trader. You simply need to:

1. Register for Self Assessment with HMRC to let them know you're self-employed and you'll be paying tax as a sole trader. You are required to register when you earn more than £1,000 in a tax year (from 6 April to 5 April) from your self employed activities. You’ll need your National Insurance number in order to register.
2. Choose a business name. You can trade under your own name or choose a unique business name. If you use a business name, it must not conflict with a registered trademark or existing business name. See the rules when choosing a business name.

Compliance & Accounting for Sole Traders

The record-keeping requirements are far less complex than that of limited companies but as a sole trader, you:

• Must maintain records of business finances such as income, expenses and receipts. These are essential to calculating the taxes owed.
• Do not need to file annual accounts (provided you don’t surpass certain thresholds).
• Must file an Annual Self Assessment tax return with HMRC to report income and expenses. If you're new to this, learn how Self Assessment Payments on Account work.

At Ecommerce Accountants, we would be happy to help you keep your new business compliant by handling your accounts. If you’d like to learn more please fill in the form on this page.

What Taxes do Sole Traders pay?

Income Tax

With this structure, all profits made by the business are considered personal income and face Personal Income Tax. See the rate table below.

National Insurance Contributions

As part of their Self Assessment, sole traders pay both Class 2 and Class 4 NICs on profits. The table below provides an idea of NI contributions at various salary levels. The rates for 2024/25 are as follows:

• Class 2 NICs are paid at a flat rate of £3.45 per week (Payable if profits exceed £6,725 per year).
• Class 4 NICs are paid at 6% on profits between £12,570 and £50,270.
• Class 4 NICs are paid at 2% on profits over £50,270.

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Sole Trader Advantages and Disadvantages

Advantages of Sole Trader

• Ease of setup with far less paperwork and admin when compared to other structures.
• Simplicity in terms of managing the business with fewer compliance requirements.
• Full control since you make all business decisions.
• Lower costs as there are no registration fees with minimal ongoing expenses.
• Full privacy as you do not need to disclose financial and other information publicly as you need to do with limited companies.

Disadvantages of Sole Trader

• Unlimited liability means you are personally liable for any debts or claims against the business.
• Limited growth avenues as investors are less likely to get involved than with more formal structures. This makes it harder to raise capital.
• Tax disadvantages may become an issue as your profits grow and you reach higher tax rates within the personal Income Tax brackets.

Example of a Sole Trader

If you're a freelancer providing graphic design services to clients, you could set up as a sole trader. You would make all business decisions while keeping records of all income and expenses. At the end of the personal tax year, you would submit a self assessment tax return and pay personal income tax on the profits. You keep all the profits after tax.

On the downside, if you run into debt, your personal assets could be at risk because, in legal terms, both you and the business are considered one entity.

When to Set Up as a Sole Trader

Solopreneurs, freelancers and small businesses often begin as sole traders. This structure may be best if:

• You’re just starting out and want the simplest, lowest cost structure to test your business idea.
• You want maximum flexibility and minimal regulation.
• You are comfortable with unlimited liability and the associated personal risks.
• Your business is small and you aren’t looking for external investment.

Private Limited Company (Ltd)

What is a private limited company? A Private Limited Company is a business structure offering limited liability to shareholders while still being privately held. This type of company is a separate legal entity from its owners. It can therefore own property, sue, and be sued under its own name. This also means the personal assets of the owners (shareholders) are protected in the event that the company runs into financial problems. It is a popular structure, accounting for 37% of all business in the UK as of January 2024 (including PLCs).

Setting Up a Limited Company

You need to register your company with Companies House which can be done online or via post. In the process, you’ll need to provide:

1. A unique company name which must end with either “Ltd” or “Limited.” This cannot conflict with existing business names or trademarks. See the rules for choosing a business name here.
2. A physical address for the company. This will become the registered office address and will be publicly available on the online register. It cannot be a PO Box address. See all the rules for company addresses here.
3. An email address. This will not be publicly listed.
4. Directors’ and shareholders’ details. A minimum of 1 director is required.
5. Details of share capital. A minimum of 1 shareholder and 1 share.

You will also need 3 pieces of personal information about yourself and shareholders, such as:

• mother’s maiden name
• father’s first name
• town of birth
• telephone number
• passport number
• national insurance number

It costs £50 to register a limited company and may take as little as 24 hours.

During registration, you will create a Government Gateway user ID and password for your company. This must be different from your personal Government Gateway ID.

Within 15 days of registration, you will be sent a 10-digit Unique Taxpayer Reference (UTR). Upon receiving it, you must add Corporation Tax services to your business tax account.

Compliance & Accounting for a Limited Company

Unlike for Sole Traders, bookkeeping and accounting for Limited Companies is more complex.

• In order to file statutory accounts and other requirements each year, you need to maintain accurate financial records. This means retaining all sales and purchase invoices and receipts, bank statements, payroll and VAT records (if applicable).
• Each year, you need to produce statutory accounts which include an income statement, a Balance Sheet and Notes to the Accounts. Your first statutory accounts must be filed within 21 months of incorporation, with subsequent accounts being filed within 9 months of the end of the company’s financial year.
• In terms of Corporation Tax, you need to calculate the company’s taxable profits and submit a Company Tax Return (CT600) to HMRC.
• Each year, you need to file a Confirmation Statement with Companies House to confirm the company’s details.
• If the company is paying salaries, you need to keep payroll records and file Real-Time Information (RTI) submissions with HMRC.
• If the company is VAT registered, you need to maintain accurate VAT records and submit VAT returns (often quarterly).

If you’d like our help with any of your LTD company’s accounting and compliance, please fill in the form on this page.

What Tax does a Limited Company pay?

A Private Limited Company (Ltd) may be subject to various taxes. The most significant are Corporation Tax, Value Added Tax (VAT) if VAT registered and Pay As You Earn (PAYE) if the company has employees.

Corporation Tax

This tax is levied on the profits of the company. The rates of Corporation tax are currently as follows:

• 19% applies to profits up to £50,000.
• 25% (Main rate) applies to profits above £250,000.
• 26.5% (Marginal Relief) applies to profits between £50,001 and £250,000.

Value Added Tax (VAT)

VAT is a tax on goods and services provided within the UK. The VAT registration threshold is set at £90,000. If annual taxable turnover exceeds this, the company must register for VAT. The rates of VAT are as follows:

• Standard rate: 20%.
• Reduced rate: 5% (e.g. children’s car seats and home energy)
• Zero rate: 0% (e.g. most food and children’s clothes)

PAYE (Pay As You Earn) & Employer National Insurance Contributions

If the company employs staff or pays any of the directors a salary, it must operate a PAYE system to collect Income Tax and NICs. Employer NICs are payable at 13.8% on employee earnings exceeding the secondary threshold (£175 per week as of 2023/24). See the table below to gain an idea of the Employer NICs payable at various salary levels.

Dividend Tax

When distributing post-tax profits to shareholders as dividends, the shareholders will pay tax on dividends exceeding the annual tax-free allowance of £500 (2024/25). The Dividend Tax Rates are as follows:

• Basic Rate: 8.75% (dividends falling within the first £50,270 of all income)
• Higher Rate: 33.75% (dividends falling between £50,271 and £124,140 of all income)
• Additional Rate: 39.35% (dividends falling above £124,140 of all income)

Income Tax & NICs

In terms of salaries, directors and employees are subject to Income Tax and National Insurance Contributions as covered for Sole Traders above.

Advantages and Disadvantages of Private Limited Company

Advantages of a Private Limited Company

• Limited liability for shareholders as their personal assets are protected.
• Increased credibility as incorporation formalizes the business with customers and suppliers.
• Tax advantages can be achieved, particularly when profits are reinvested.
• Less public disclosure of financial and operational details than public limited companies (PLCs).
• Greater control over ownership than PLCs because shares aren’t publicly traded.

Disadvantages of Private Limited Company

• Increased admin as LTD companies must adhere to requirements (e.g. filing annual returns)
• Double taxation can occur when the company’s profits are first subject to Corporation Tax and then potentially dividend tax (if dividends are paid).
• Increased costs may be incurred when compared to sole trader operations as ongoing accountancy or legal work may be needed to ensure compliance.

Example of Private Limited Company

If you begin selling your own fashion line from your website, you may choose to set up as a private limited company. You would be the sole director and shareholder (although you could choose to appoint additional ones). You would work independently, making all business decisions. 

As your products sell, the business builds up cash reserves. You choose to re-invest this cash (pre-tax) to further grow your business. Optionally, you might choose to begin paying yourself a tax efficient salary (as an employee). See our blog on the most tax efficient director’s salary for more information.

At the company’s financial year end, the profit will be subject to Corporation Tax. You may then issue a dividend to yourself from the post-tax profit. You would pay Dividend Tax (which sits at a lower rate than Income Tax) on this income.  

Since your company is seen as a separate legal entity to you, your personal assets are not at risk should the business run into financial trouble.

When to Register a Limited Company

This company may be the best fit if:

• You're starting a business and want to protect your personal assets with this structure’s limiting liability benefits.
• You are at a stage where a limited company is more tax-efficient compared to operating as a sole trader. Corporation Tax rates are often lower than those of personal Income Tax. As an owner, you can take income as a mix of salary and dividends, often reducing your overall tax liability.
• Your business has outgrown its current structure (sole trader/partnership) and you want a more professional image ( that a limited company provides) to expand and attract bigger clients or investors.
• You plan to hire employees, it is easier to handle payroll and employer obligations through a limited company. You can then also pay yourself a salary via the company’s payroll system.

Limited Liability Partnership (LLP)

What is a limited liability partnership? A Limited Liability Partnership (LLP) is a flexible business structure, combining the limited liability protection of a company with the elements of a partnership. It is often the choice amongst professional service providers such as accountants, lawyers and consultants. 

One of the key differences between Limited Companies and LLPs is that an LLP’s profits do not face corporation tax. Profits are distributed to the partners, who are individually taxed on their share of profits via Self Assessment. This avoids the double taxation seen in limited companies.

An LLP is not the only type of partnership in the UK. You might also consider a Limited Partnership (LP) or a General Partnership (GP). LLPs are, however, the most popular so we will focus on them in this blog but you can see a comparison of the 3 partnership structures in the table below. Partnerships are less popular than the other structures, accounting for 6% of businesses in the UK as of January 2024.

Setting Up a Limited Liability Partnership

The government provides a handy checklist when it comes to setting up an LLP but you will need to:

1. Choose a name that is unique and ends with "LLP” or ‘Limited Liability Partnership.” The name must not be the same as, or too similar to existing company names. You can check a potential name’s availability by searching for it on the Companies House Register.
2. Provide a physical address for the company. This will be the LLP’s registered office address and publicly available via the online register. It cannot be a PO Box address. See all the rules for company addresses here.
3. Provide an email address. This will not be publicly listed.
4. Appoint members of your LLP. There must be at least two designated members. They are responsible for the LLP’s filing and compliance. Every member must register with HMRC for Self Assessment.
5. Prepare an LLP Agreement. Although not required, this is recommended. The agreement should outline the management, profit-sharing arrangements and dispute resolution methods of the partnership.
6. Register your LLP with Companies House. You can do this via 3 methods:
   • Use third-party software to register yourself. This is often the quickest method. It normally costs £50 to register your LLP using software. There is also a same day service available at a cost of £78, for which you must apply before 3pm.
   • Use a formation agent to register your LLP on your behalf.
   • Register via post by downloading and filling out this application to register a limited liability partnership. It costs £71 to register your LLP via post and this often takes longer.

Companies House will send you a certificate of incorporation once the LLP has been successfully registered.

Once your LLP is registered, you need to:

• Register the LLP for Self Assessment with HMRC.
• Ensure all designated members register for Self Assessment as individuals.
• Register the partnership for VAT if you expect the LLP’s sales to exceed £90,000 a year.
• Register an employer with HMRC and set up PAYE if the LLP will pay salaries to partners or staff.

Compliance & Accounting for a Limited Liability Partnership

As a designated partner of an LLP, you need to:

• Maintain accurate financial records. These must cover income and expenses, assets and liabilities as well as all contributions and drawings of the partners. If applicable, the LLP must also retain detailed VAT records.
• Produce statutory accounts each year, including an Income Statement, a Balance Sheet and Notes to the Accounts (as with a Limited Company). The accounts must be filed within 9 months of the end of the LLP’s financial year.
• File a Confirmation Statement with Companies House to confirm the LLP’s details are correct. You must file this within 28 days of your made-up date, which might be the anniversary of the LLP's incorporation.
• File an annual Partnership Tax Return with HMRC, detailing the LLP's income and profit distribution among partners. This is due on 31 January following the applicable tax year.
• Ensure each partner of the LLP reports their portion of the LLP's profits on their own personal Self Assessment Tax Return. Also due on 31 January following the tax year.
• Submit VAT returns on a quarterly basis (if the LLP is VAT registered)
• Operate PAYE and submit Real Time Information (RTI) reports to HMRC (If the LLP pays salaries to partners or staff)

If you’d like our help with your LLP’s accounting and compliance, please fill in the form on this page.

What Tax does a Limited Liability Partnership pay?

Personal Income Tax & NICs

LLPs do not pay Corporation Tax. LLP profits are passed onto the LLP’s partners who pay personal income tax and National Insurance Contributions (as discusssed above for Sole Traders) on their share of the profits through Self Assessment.

Capital Gains Tax (CGT)

Should the LLP dispose of assets, any capital gains fall to the partners, who are personally responsible for reporting and paying the applicable CGT. See the rates of CGT in the table below. You can also learn how to avoid capital gains tax in the UK legally in our blog.

PAYE (if applicable)

If the LLP pays employees (or partners) salaries, it must operate PAYE to collect the associated Income Tax and NICs. (As covered above for Limited Companies)

VAT (if applicable)

If their taxable turnover exceeds £90,000 per year, LLPs must register for VAT and file quarterly VAT returns. (As covered above for Limited Companies)

Advantages and disadvantages of a Limited Liability Partnership

Advantages of an LLP

• Tax efficiency: Since LLPs are not subject to Corporation Tax. Profits are passed directly to partners who pay taxes via Self Assessment which avoids double taxation seen in limited companies.
• Limited liability reduces the personal financial risk for the partners.
• Flexibility in terms of profit-sharing and management structures.
• Ability to raise capital through partner contributions while the LLP may borrow in its own name.
• Professional image for businesses such as accounting or law firms.

Disadvantages of an LLP

• Privacy concerns may arise since LLPs need to file annual accounts as well as a confirmation statement, some financial information is public.
• Tax rate disadvantages may appear for partners (Income Tax) when compared to Corporation Tax for companies, depending on the level of profits distributed.
• Dissolution challenges may arise when closing an LLP as it is not as simple as closing a general partnership (GP) or sole proprietorship.
• Compliance obligations need to be met by LLPs on an ongoing basis.
• Disputes may arise between partners, making business decisions more difficult.

Example of a Limited Liability Partnership

You and a friend are both lawyers and decide to start your own practice. You register a Limited Liability Partnership. You are both appointed as designated partners of the LLP and responsible for keeping it compliant. Together, you draft a Partnership Agreement, outlining each of your responsibilities and how you’d handle disputes should they arise in the future.

You begin serving clients. You work together, making all business decisions. The LLP builds up cash reserves. You both begin earning salaries (and register the LLP as an employer etc.).

At the LLP’s financial year end, you submit a Partnership Tax Return, detailing the income and expenses of the business. The remaining profit is divided equally between both of you. You each report and pay personal income tax on your earnings via Self Assessment. 

Since the LLP is seen as a separate legal entity to both of you, neither of your personal assets are at risk should the business face financial trouble.

When to Register a Limited Liability Partnership

A Limited Liability Partnership (LLP) is well suited to:

• Professional services firms (e.g. consultants, accountants)
• Businesses who want passive investment from external parties without giving up management control (e.g. silent partners)
• High-risk startups who want liability protection (e.g. construction projects)
• Groups of freelancers or contractors who wish to team up
• Family-run businesses

Public Limited Company (PLC)

What is a Public Limited Company? Although similar to a Private Limited Company (LTD), a Public Limited Company (PLC) offers shares to the public via a stock exchange. This enables a PLC to raise capital quickly from a vast range of investors. It is the most formal and highly regulated business structure listed here, which is why it is suited to larger companies looking to expand. Limited Companies (LTDs and PLCs) make up 37% of all business in the UK but with Private Limited Companies accounting for 95% of this, roughly 2% of businesses in the UK are registered as PLCs.

Setting Up a Public Limited Company

With stricter legal, financial and regulatory requirements, setting up a PLC is far more complex than your standard LTD company. We will focus on the additional requirements for a PLC.

First, you need to ensure you are eligible to register as a PLC:

• Minimum Share Capital: A minimum share capital of £50,000 is required with at least 25% of the value of the shares (£12,500 minimum) paid up before registration.
• Directors and Secretary: At least 2 directors and 1 qualified company secretary must be appointed. The directors must be over 16 years old and the secretary needs to be a member of a professional body such as ICSA with experience in law or corporate governance.
• Registered Office Address You must have a UK-based office address.
• Memorandum & Articles of Association: You must prepare this document which outlines the company’s purpose and governance structure.
• Prospectus (if applicable): If you will be issuing shares to the public, you need to create this document which details information about the company, finances and the share offering.

If eligible you will need to register the PLC. To do this, you need to:

1. Choose a unique company name which must end with either “PLC” or “Public Limited Company.” This cannot conflict with existing business names or trademarks. See the rules for choosing a business name here.
2. Register your PLC with Companies House by completing and submitting Form IN01 and provide supporting documents such as the Memorandum & Articles of Association. You need to post this and pay the registration fee of £71. You cannot register a Public Limited Company online (as you can do for a LTD company).
3. Obtain a Trading Certificate from Companies House before your PLC commences trading. You need to submit proof that the minimum share capital requirements have been met (£50,000 with 25% paid up). You can expect the certificate to be issued within 5-10 working days of submission.
4. Appoint an external auditor since it is required that PLCs have their accounts audited every year.

Compliance & Accounting for a Public Limited Company

Public Limited Companies are subject to all the compliance and accounting requirements of Private Limited Companies mentioned above and more. We will focus on the additional requirements of PLCs:

• An external auditor must audit your accounts each year. Each year, you must file your audited accounts with Companies House. In addition, you must provide the full financial statements to your shareholders and the public.
• If your PLC will be listed on a stock exchange such as the London Stock Exchange (LSE), it needs to meet the stock exchange's minimum requirements. For example, the LSE requires your PLC to comply with the rules of the UK Listing Authority (UKLA).
• You will also need to prepare for your IPO (Initial Public Offering), which is the process of offering shares to the public for the first time. This will include issuing a prospectus and engaging various financial and legal advisors.
• If your PLC is listed on a stock exchange, it must comply with the UK Corporate Governance Code which provides rules on your board’s composition, engagement with shareholders and transparency. Your PLC must also abide by Stock Exchange Rules, for example, when publishing financial reports.
• All PLCs must hold an Annual General Meeting (AGM) to keep shareholders up to date and make key decisions.

What Tax does a Public Limited Company pay?

The taxation of UK companies, whether Public Limited Companies (PLC) or Private Limited Companies (LTD), is the same. For that reason, we won’t repeat the same here but please refer to the tax section for Private Limited Companies above.

Advantages and Disadvantages of a Public Limited Company

Advantages of a Public Limited Company

• Ability to raise capital by issuing shares to the public. Their status also makes it easier to attract institutional investors (e.g. pension funds)
• High credibility from the public listing enhances the company’s reputation.
• Limited liability protects the personal assets of shareholders’ beyond their investment in the company.
• Expansion opportunities increase due to access to capital.
• Liquidity for shareholders who can buy and sell shares on the stock market.

Disadvantages of a Public Limited Company

• Increased regulations as PLCs are subject to strict reporting and compliance requirements.
• Control concerns may arise because shareholders can influence decisions and significant shareholding can lead to takeovers.
• Less privacy as financial details must be made publicly available.
• Significant costs will be incurred for PLC set up, listing, and compliance (e.g. audits).

Example of a Public Limited Company

You would likely be running a large business before registering as a PLC but here is an example.‍

Tesco PLC is a Public Limited Company in the retail and grocery industry but it did not start out as a PLC.

It was founded by Jack Cohen in 1919 as a market stall selling surplus groceries in East London. It was only incorporated as Tesco Stores Limited, a Private Limited Company (LTD), in 1932 which formalized its operations.

It became Tesco PLC, a Public Limited Company (PLC) in 1947 and listed its shares on the London Stock Exchange. This enabled the business to raise capital for further expansion.

Each year, they share Tesco PLC’s financial statements publicly and they hold an annual Tesco AGM for shareholders.

When to Register a Public Limited Company

You might consider registering a PLC:

• If you have a large company and are in need of additional capital to fund expansion or operations.
• If you have a high-growth business with strong growth potential which will attract public investors.
• If you have a successful business and are looking to increase the profile and credibility of your company through a public stock exchange listing.

That concludes our comparison of the different types of business structures in the UK. Whether you choose to register as a Sole Trader, set up a Private Limited Company (LTD), form a Limited Liability Partnership (LLP) or incorporate a Public Limited Company (PLC), we hope this helps you select the best business for your needs. If you need help with incorporating, please get in touch with us. After setting up, if you’d like us to be your accountants, so you can focus on growing your business, please fill in the form on this page.