Business Structure Types Legal Doc 2
Business Structure Types Legal Doc 2
Business Structure Types Legal Doc 2
types: limited
company vs sole
trader vs partnership
4min read
by Nick Green
Last updated 01 December 2022
The way in which your business grows, pays tax, takes big decisions and deals with
liabilities will depend on its legal structure. This is something you decide at the outset,
but can change later on if it becomes desirable. In the UK there are four popular types
of business structure.
Being a sole trader doesn't necessarily mean you work alone. You can employ staff, so
long as you inform HMRC and follow employment law.
Summary: A simple and agile structure, but with a lot of personal risk.
Partnership
In a partnership, a number of individuals sign a partnership agreement to establish
how the business’s ownership, profits and liabilities are shared between them, and
how partners may leave the partnership.A partnership is similar to the sole trader
structure, except that there are at least two of you. There is no legal upper limit to the
number of partners, though very large partnerships can be riskier to manage
(see Limited Liability Partnerships). Each partner registers as self-employed and
submits a separate tax return. Your tax and NI obligations are similar to those of a sole
trader.
Advantages of a partnership
The advantages of a partnership are flexibility and simplicity, with the added bonus of
having more owners to run the business.
Disadvantages of a partnership
In a partnership, all partners are jointly responsible for all the business debts. This
means for instance that if one partner is sued successfully, all partners must share the
damages.
Summary: A streamlined setup for business partners who know and trust each other
well.
Limited company
Incorporating your business as a limited company requires you to register it
at Companies House. This creates a separate legal entity, which is your company. Find
out more about setting up a company.
Another big advantage is the tax regime: companies pay corporation tax at 19 per cent
on their profits. This can be significantly more tax-efficient than paying income tax on
income, especially for higher-rate taxpayers (though as a director you will still have to
find a way to take income from the company, such as salary or dividends, which will
be taxed accordingly).
Summary: Good for the maturing business that is ready to trade agility for greater
stability.
Advantages of an LLP
As with an ordinary partnership, each partner in an LLP registers as self-employed
and submits a separate tax return. But if the business fails, each partner is only liable
for the face value of his or her share.
Disadvantages of an LLP
The administrative burden of an LLP is similar to that of a limited company, so
an accountant and company secretary may be desirable (though not required by law).
If you found this article useful, you might also find our article on buying out a
business partner informative, too.