Business structure types: limited company vs sole trader vs partnership

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.

What are the different types of business structure?

• Sole trader

• Partnership

• Limited company (Ltd)

• Limited liability partnership (LLP)

All of these business structures have advantages and disadvantages, depending on factors such as the size of your business, the nature of your business and your future plans for it.

Here's a quick summary of each type of business structure, and how they compare against each other.

Sole trader ('self-employed')

Being a sole trader is often referred to simply as being 'self-employed,' though there are other forms of self-employment (such as being a contractor).

A sole trader is the most popular structure for a startup, and also the simplest.

You pay income tax on your profits (rather than corporation tax), so any profits above £50,270 will be taxed at 40%, and profits above £125,140 will be taxed at 45%.

You’ll also owe national insurance (NI) contributions on your earnings - 6% on profits between £12,570 and £50,270 and 2% on profits over £50,270. 

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.

Advantages of being a sole trader

As a sole trader you pay no fees to register, you have very little red tape, and you are in full control of business decisions.

You also get to keep all the profits from the business, after tax.

Disadvantages of being a sole trader

The main drawback is that your business and personal finances are not legally separate.

This means that, if the business has debts or is sued, any liability can be met from your personal wealth.

This exposes you to more personal risk than other business structures, so may not be suitable for a high-cost startup.

From April 2026, sole traders expecting to earn £50,000 or more will have to register for Making Tax Digital.

This new government system means sole traders and businesses need to use a digital system to keep tax records and make payments.

Sole traders with profits of £30,000 will have to register from April 2027, while those with profits over £20,000 have until April 2028.

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.

Advantages of a limited company

The main advantage of setting up a limited company is that its finances are separate from yours.

This reduces your personal exposure to financial risk, so if the business fails (or is sued), then you are usually liable only for the face value of your share in the business.

There is also more scope for tax planning as a director of a limited company.

For example, because the company is a separate legal entity, you choose when dividends are paid and retain profits in the company to reduce your overall tax bill.

Taxes on dividends are increasing by 2% from April 2026. The rate for basic-rate taxpayers will rise to 10.75%, while the rate for higher-rate taxpayers will increase to 35.75%.

The additional rate remains unchanged.

Learn more: How to reduce corporation tax

Disadvantages of a limited company

One downside is that a limited company involves much more administration.

You are likely to need a company secretary and very probably an accountant too (though you can outsource both of these roles).

You must submit an annual company tax return and full statutory accounts to HMRC, and are responsible for paying employees’ income tax and NI contributions too.

Another disadvantage is the tax regime: companies with profits under £50,000 pay corporation tax at 19%.

However, you will also have to pay taxes when you take income from your business, such as income tax, NI and dividend tax. In many cases, the overall tax burden is higher than that of a sole trader.

Summary: Good for the maturing business that is ready to trade agility for greater stability.

Contractors - your own company, or an umbrella company?

Contractors often set up a limited company of one person, or work through an umbrella company.

The limited company option has become less popular for contractors in recent years due to new IR35 rules.

These rules mean that those who are deemed to be working under IR35 have to pay extra taxes, like employers’ NI, from their contract income.

As a result, many contractors choose to use an umbrella company instead.

The umbrella company is their employer for tax purposes - they manage tax and make payments directly to HMRC.

Sole trader contractors are rare, as clients and agencies face the issue of whether or not the contractor counts as an employee for legal purposes.

Limited liability partnership

A limited liability partnership (LLP) is a popular structure for professional services such as accountancy and legal firms.

In most respects they are similar to ordinary partnerships (see above) but as the name implies they have limited liability (like a limited company).

An LLP must be registered at Companies House, and at least two partners must be ‘designated members’ who take responsibility for filing the annual accounts.

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).

Summary: A sensible step for partnerships above a certain size.

Comparing different business structures

Here you can compare the different business structures side by side and see the main strengths and weaknesses of each.

Ask your accountant about the most suitable structure for your business at its current stage of development.

Seek expert financial advice

Choosing the right legal structure is one of the most foundational decisions a business owner will make, profoundly impacting everything from personal liability and tax efficiency to administrative burden and potential for growth.

As your business evolves, the optimal structure may change. Therefore, seeking professional guidance from an accountant or financial adviser is not just a preliminary step but a crucial ongoing strategy.

They can provide tailored advice based on your specific industry, current profits, and future ambitions, ensuring your business is always built on the most advantageous and compliant foundation possible.

If you found this article useful, you might also find our article on buying out a business partner informative, too.