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You’ve got a great idea for a business and can’t wait to get started. Amongst the many things you need to do first, one of them is to decide what type you want it to be. This is important as it can affect who makes the decisions, how you split the profits, how much tax you pay, and what you are liable for if something goes wrong.

This article gives you a brief overview of the main types of UK businesses, and the pros and cons of each.

What type of business is right for me?

You may have heard of the terms ‘sole trader’ or ‘limited liability’ before but aren’t quite sure what they are. Here is a brief summary of the four main types of business structure.

1. Sole trader

Being a sole trader simply means you are self-employed. You work for yourself, get to make all the decisions and take all the profits. But, you are personally liable for any debts. This means you will have to cover any amount the business owes with your own personal funds.

You pay income tax on your profits, (along with National Ins.urance) so keep records of your sales and expenses as you’ll have to file a Self Assessment tax return every year. For more information on this read our article Getting to grips with tax.

2. Partnership

A partnership is similar to a sole trader, except that there are at least two of you. Those involved sign a Partnership Agreement which sets out how the business’s ownership, profits and liabilities are shared between you.

Each person must register separately as self-employed and submit their own tax return. There is one difference though - all partners involved are jointly responsible for meeting any business debts from personal wealth.

3. Private limited company

A limited company is basically a business in which your liability for any debt is ‘limited’ to the value of the money you’ve invested in it. So unlike a sole trader, anything owed by your business is not met by your own personal wealth.

A private limited company is usually owned by a small number of people who’ve each invested money into the business. In return for your investments you are allocated shares, and you become the ‘shareholders’. Any profits made belong to the company, and you pay corporation tax on them. Once this is paid the remaining profits can be distributed to the shareholders in the form of dividends. 

Setting up a limited company requires registering it at Companies House for a fee, and comes with a greater amount of paperwork. In addition you would be subject to higher levels of administration when it comes to submitting yearly accounts and providing details on how the company is run. It may be advisable to seek the services of an accountant.

4. Limited liability partnership (LLP)

This structure is similar to ordinary partnerships but as the name implies you would have limited liability (like a limited company). Each partner in an LLP registers as self-employed and submits a separate tax return.

Just like a limited company you need to be registered at Companies House.

Pros and cons of each business type

There are many questions that need answering before you decide on the type of business that’s right for you. How much start-up money do I need? Do I have all the skill sets required? Do I want to take all the risks? Can I afford to share the profits?

To help here’s a handy guide that summarises the advantages and disadvantages of the four business structures.

Business Structure	Advantages	Disadvantages
Sole Trader	Pay no fees to register the business Have full control of business decisions Keep all the profits after tax	Debt is met from your personal wealth No one else to share workload which could mean long hours and skill shortages
Partnership	Pay no fees to register the business Raise more start-up funds from additional partner(s) Shared responsibility and workload Increased skill sets	Profit share Greater risk of disagreements Joint responsibility of debt - if one partner is successfully sued, all partners share the damages
Limited Company	Limits your personal exposure to debt Profits subject to lower levels of corporation tax	Pay to register Involves higher levels of admin and accounts scrutiny which may require an accountant
Limited Liability Partnership	Raise more start-up funds from additional partner(s) Shared responsibility and workload Increased skill sets Limits your personal exposure to debt	Profit share Greater risk of disagreements Joint responsibility of debt - if one partner is successfully sued, all partners share the damages Pay to register Involves higher levels of admin and accounts scrutiny which may require an accountant

Related articles:

• Getting to grips with tax