how to choose the right business structure
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Jan 12 2026

How to Choose the Right Business Structure: Sole Trader, Partnership, LLP or Limited Company

Starting a new business in the UK is an exciting step, but selecting the correct business structure is one of the most important early decisions. Your choice affects liability, taxation, administrative burdens, funding options, and growth potential. With UK rules stable into the 2025/26 tax year, understanding the options helps avoid future complications.  

At Jan McDermott & Co Chartered Accountants in Wirral, serving clients across the UK, we guide startups and small businesses through choosing the correct business structure. As Xero Certified Advisors, we offer expert advice on sole trader vs limited company, LLP setup, and partnership structures, plus company formation, tax planning, and cloud accounting.  

This guide compares the main UK business structures, sole trader, limited company, partnership and limited liability partnership (LLP), updated for December 2025 rules. 

1. Sole Trader: The Simplest Option

A sole trader is the easiest and most common for solo entrepreneurs. 

  • Setup: Register with HMRC for Self-Assessment (by 5 October in your second tax year). No Companies House filing. 
  • Liability: Unlimited – personal assets at risk for business debts. 
  • Taxation: Profits taxed as personal income (after £12,570 allowance). Income Tax rates: 20% basic, 40% higher, 45% additional. Class 4 National Insurance: 6% on profits £12,570–£50,270; 2% above. 
  • Admin: Minimal simple Self-Assessment, private records. 

Ideal for low-risk, low-profit startups like freelancers or consultants testing ideas. 

sole trader, the simplest option

2. Limited Company (Ltd): Growth and Protection

A private limited company is a separate legal entity, most popular for scaling UK startups. 

  • Setup: Incorporate via Companies House need directors, shareholders, articles. 
  • Liability: Limited-shareholders liable only for unpaid shares (often £1). 
  • Taxation: Pays Corporation Tax: 19% on profits ≤£50,000; marginal relief to 25% on >£250,000. Directors extract via salary (tax/NI efficient) and dividends (lower rates, £500 allowance). 
  • Admin: Annual accounts, confirmation statement, CT600 return (public filings). 

Often more tax efficient for limited companies at higher profits; easier investor attraction via shares. 

limited company, growth and protection

3. Partnership: Sharing the Load

A general partnership suits 2+ people sharing ownership. 

  • Setup: Simple agreement recommended; register each partner with HMRC. 
  • Liability: Unlimited, partners jointly/severally liable. 
  • Taxation: Tax-transparent; each partner pays Income Tax and NI on their share via Self-Assessment. 
  • Admin: Partnership return plus individual returns; private accounts. 

Good for collaborative small businesses wanting flexibility without complexity. 

partnership, sharing the load

4. Limited Liability Partnership (LLP): Protection with Flexibility

An LLP combines partnership flexibility with limited liability, popular in professional services. 

  • Setup: Register with Companies House; need LLP agreement and ≥2 designated members. 
  • Liability: Limited, members liable only for their investment (not personal assets for business debts). 
  • Taxation: Tax-transparent like partnerships; members pay Income Tax/NI on shares, no Corporation Tax. 
  • Admin: File annual accounts/confirmation statement (public); more formal than partnerships. 

Suits professionals needing liability protection while retaining partnership tax benefits. 

limited liability partnership

Key Comparison Table

Aspect  Sole Trader  Partnership  LLP  Limited Company 
Setup Cost/Complexity  Low/Simple  Low  Medium  Medium 
Liability  Unlimited  Unlimited  Limited  Limited 
Taxation  Income Tax + NI  Income Tax + NI per partner  Income Tax + NI per member  Corporation Tax + personal on extractions 
Privacy  High (private records)  High  Lower (public filings)  Lower (public filings) 
Funding/Investment  Limited  Limited  Loans/personal  Easy (shares) 
Best For  Solo, low-risk startups  Small collaborative teams  Professionals needing protection  Growing businesses 

Factors to Consider When Choosing

  • Risk Level: High-risk? Choose limited company or LLP for asset protection. 
  • Profit Expectations: Below £50,000? Sole trader simpler. Above? Limited company tax advantages often save thousands. 
  • Growth Plans: Seeking investors? Limited company essential for shares. 
  • Admin Tolerance: Prefer minimal paperwork? Start as sole trader; many incorporate later. 
  • Number of Owners: Solo → sole trader/Ltd. Multiple → partnership, LLP, or Ltd. 
  • Professional Restrictions: Some professions favour LLP. 

Switching structures is possible (e.g., sole trader to limited company is common), but it is advisable to plan early to avoid Capital Gains Tax. 

 

Why Professional Advice is Essential

Choosing a business structure in the UK impacts long-term success amid evolving rules (e.g., stable Corporation Tax rates, frozen thresholds). Wrong choice leads to higher taxes, compliance issues, or restricted growth. 

Jan McDermott & Co specialises in business structure advice for startups, including modelling tax scenarios, company formation, Xero setup, and ongoing support. We help UK small businesses and new startups choose wisely. 

Ready to select the right structure? Contact us for a free consultation.