Choosing the right business structure
The starting point when setting up a brand new business is deciding what type of trading entity you will be. Broadly speaking there are three main trading entities: sole trader, partnership and private limited company (although there are also variations on each of these e.g. public company, unlimited company, limited liability partnership). The brief guide below, discusses the general advantages and disadvantages of each entity.
SOLE-TRADER
Ideal for: “low-cost start-up that is engaged in a low risk business activity”
| Advantages | Disadvantages |
| Setting up is cheaper than a limited company | You are personally liable for your business debts – liability is unlimited |
| Does not require registration at Companies House – there is very little red tape | You are personally liable for any claims by your employees |
| Can produce simple accounts | Your profits are taxed as income by HMRC |
| Can easily convert to a limited company later on | |
| Despite the name, you can employ staff |
PARTNERSHIP
Ideal for: “low-cost start-up with two or more business partners that is engaged in a low risk business activity”
| Advantages | Disadvantages |
| Setting up is cheaper than a limited company | You are personally liable for your business debts – liability is unlimited |
| Does not require registration at Companies House | You are liable for all the partnership business debts even if the other partner was responsible for incurring them – liability is unlimited |
| Can produce simple accounts | You are personally liable for any claims by your employees |
| Can convert to a limited company later on | Your profits are taxed as income by HMRC |
LIMITED COMPANY
Ideal for: “start-up with potential to grow big, that is engaged in a more risky business activity”
| Advantages | Disadvantages |
| A limited company may give your business more credibility | Forming a limited company is more costly than forming a sole trader or partnership |
| Your liability is limited to the amount you invested in the company | The admin burden is greater – e.g. you need to file an ‘annual statement’ at Companies House and file company accounts each year. |
| It is easier to pass on shares to a member of your family, or another successor | More detailed annual accounts are required and as a result are likely to cost more |
| There are tax advantages for high earners by keeping any unneeded money in the business rather than taking it all out each year and being taxed on it | If you decide to cease trading, it can be difficult and expensive to wind up the company |
