A guide to start up business structure

Launching a start-up is exciting but choosing the right business structure can be confusing for many entrepreneurs.

Read on as we explore the various options available.

This will help you make an informed decision that sets your start-up on the path to success.

What business structure should a start-up adopt?

One of the first decisions for most start-up owners is deciding the business structure under which to trade.

Your chosen structure will influence how your business operates and how much tax you will pay.

There are four primary business structures.

Sole trader

A sole trader is a self-employed individual who owns and runs a business.

Setting up a business independently can give you complete control and have fewer administrative burdens.

However, you also have unlimited liability, which means you risk personal financial loss if something were to go seriously wrong.

Sole traders must register with HM Revenue & Customs (HMRC) and file an annual Self-Assessment tax return, reporting their business income and expenses.

They pay Income Tax and National Insurance contributions on their business profits.

Pros of being a sole trader:

• control – complete control over your business and can make decisions quickly without needing approval from others
• simplicity – setting up is straightforward with simple tax and accounting requirements
• privacy – financial information remains private, unlike limited companies, which must file publicly accessible accounts.

Cons of being a sole trader:

• personal liability – you are personally liable for your business’s debts, meaning your assets, such as your home, could be at risk
• limited financial support – it can be more challenging to secure business loans or investments, as lenders and investors may prefer the security of limited companies
• tax efficiency – as a company grows, operating as a sole trader may become less tax efficient.

Find out more about becoming a sole trader.

Partnership

If setting up a business yourself doesn’t appeal, you could consider entering a partnership.

This is usually formed by two or more people who want to run a business together.

The partners share profits or losses and unlimited legal liability.

It’s essential to define the partners’ rights and responsibilities and set them out in a partnership agreement.

Partners report their share of the partnership’s profits on their individual Self Assessment tax return.

The partnership itself files a Partnership Tax return, which shows how profits were divided among the partners.

They also pay Income Tax and National Insurance contributions on their share of the profits.

However, like with every business structure, there could be a number of pros and cons.

Pros of being in a business partnership:

• shared responsibility – responsibilities and risks are shared, reducing the workload and financial risk for each partner
• pooling resources – partners can pool their skills, knowledge and financial resources, potentially strengthening the business
• simplicity – it could be relatively easy to set up a partnership, with simpler regulatory responsibilities than a limited company.

Cons of being in a business partnership:

• joint liability – partners have joint liability for business debts and decisions, so if one partner makes a poor decision, all partners are liable
• disputes – disagreements can arise over business decisions, potentially causing conflicts and slowing growth
• instability – can be less stable than other business structures, as they can be dissolved if a partner leaves or dies.

Partnerships come in a variety of forms, including limited partnerships and limited liability partnerships (LLP).

Find out about the different types of business partnerships.

Limited Company

Private limited companies accounted for over 95% of all corporate bodies at the end of March 2023.

A limited company is a legal entity separate from its owners (shareholders) and can be private (Ltd) or public (PLC).

Ownership of the business can be changed or extra capital raised through the selling of shares without necessarily affecting the management of the company.

Shares are a unit of ownership, which means shareholders have a claim to part of the company’s assets and earnings and may have a say in decision-making.

However, limited companies have several legal requirements that can substantially add to the time and money spent on administration.

A limited company must register with Companies House and submit annual accounts and a confirmation statement to Companies House.

They must file a Corporation Tax return (a CT600 form) with HMRC, which calculates the Corporation Tax owed based on the company’s taxable profits.

Pros of being in a limited company:

• limited liability – shareholders’ liabilities for the company’s debts are limited to their investment in the company, potentially protecting personal assets
• tax efficiency – can be more tax-efficient than sole traders or partnerships, particularly at higher profit levels
• professional image – helps create a more professional image, potentially boosting your business’s credibility.

Cons of being in a limited company:

• complex administration – running a limited company may involve more complex accounting and reporting requirements than being a sole trader or partnership
• public disclosure – you must file certain documents (such as annual accounts and confirmation statements) with Companies House, which are publicly available
• director responsibilities – directors have legal responsibilities, which, if not met, could result in legal and financial penalties.

Learn more in our guide to private limited companies.

Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is a hybrid structure that combines elements of partnerships and limited companies.

It offers flexibility in management while providing limited liability protection.

Like a limited company, an LLP is a separate legal entity.

This means partners (known as members) have limited liability, protecting personal assets from business debts.

Profits are shared among members and taxed as personal income, and each member must file a Self-Assessment tax return.

LLPs are commonly found in professional service industries, such as law, accounting, and architecture.

They are also popular in sectors involving joint ventures and private equity investments.

Pros of LLPs:

• limited liability – members’ financial risk is limited to their investment in the business, so they are not personally liable for the business’s debts
• flexibility – members share decision-making and responsibility, similar to a traditional partnership
• taxation – members are taxed on their share of profits as self-employed individuals – depending on individual circumstances, this can sometimes be more tax-efficient than PAYE.

Cons of LLPs:

• public disclosure – LLPs must file accounts and other details publicly with Companies House, which might not appeal to those who want privacy
• profit distribution – profits are taxed as they arise, unlike limited companies, where profits can be retained and taxed only when distributed as dividends
• employment rights – members of an LLP may not have the same employment rights as company employees, such as maternity or sick pay, though specific rights and entitlements can be detailed in the LLP agreement).

Other types of business structure

Several other business structures may suit your business.

A Community Interest Company (CIC) is a structure used by social enterprises that want to reinvest their profits for the public good.

They are similar to limited companies but have specific requirements, such as an asset lock that prevents assets from being used for private gain.

In a cooperative, the business is owned and run jointly by its members, who share profits or benefits.

Types of cooperatives include worker cooperatives (owned and run by employees) and consumer cooperatives (owned and run by customers).

Cooperatives promote democratic decision-making and financial participation by members and typically prioritise member benefits over maximising profits.

What business structure should you choose?

There are several things to consider that can help you choose the right structure:

• business goals – your business structure should align with your long-term goals – for example, do you plan to grow rapidly or raise investment?
• liability – understand the level of personal liability you’ll have with each business structure
• taxation – different structures have different tax implications, so it could be worth consulting an accountant to make sure you understand them
• profit sharing – decide how you want to distribute profits – do you wish to keep all profits or share with partners or shareholders?
• control – if you prefer to maintain control, being a sole trader or running a private limited company might work best for you
• administration – some structures require more reporting, so make sure you’re comfortable with the level of administrative work your chosen structure will involve
• funding – think about how you plan to fund your business – limited companies may find it easier to attract investors and secure loans than sole traders or partnerships
• industry requirements – research the sector or industries you trade in – some may have specific requirements or advantages for one structure over another.
• brand perception – consider how the business structure may affect your brand’s perception – limited companies may appear more established and professional compared to sole traders
• continuity – think about your long-term plans and how you may want to exit your business – selling a limited company can be more straightforward, for example
• employees – If you plan to hire staff, consider the implications for each structure – limited companies may be able to offer more straightforward employee benefits and pension schemes.

Changing business structure

It is possible to change your business structure later on if needed.

For example, many businesses start as sole traders or partnerships, then incorporate as a limited company as they grow.

However, changing your business structure can involve significant administrative work and potential tax implications, including notifying HMRC, registering the new structure with Companies House, and possibly creating new bank accounts.

If you're considering changing your business structure, you may want to consult legal and financial advisors to fully understand the implications and process.