Business Structure

The structure you choose for your business affects everything from how much tax you pay to whether your personal assets are at risk if things go wrong. In the UK, businesses register with different bodies depending on structure. Sole traders and partnerships register with HMRC for self-assessment. Limited companies, LLPs, and CICs incorporate through Companies House, the UK's registrar of companies.

There is no single "best" structure. The right choice depends on your risk profile, how many people are involved, whether you plan to raise investment, and how much administrative overhead you are willing to take on. This chapter walks through each option so you can make an informed decision.

One important point before we dive in: you are not locked into your initial choice forever. Many businesses start as a sole trader or partnership and later incorporate as a limited company once they reach a certain size. We cover the process of changing structure at the end of this chapter.

A sole trader is the simplest way to run a business in the UK. There is no legal distinction between you and the business - you are the business. Setting up is straightforward: you register with HMRC for self-assessment and start trading. There is no incorporation fee and no Companies House filing.

How Tax Works

As a sole trader, your business profits are treated as personal income. You pay income tax at the standard rates (20% basic rate, 40% higher rate, 45% additional rate) and Class 2 and Class 4 National Insurance contributions on your profits. You file a self-assessment tax return each year by 31 January following the end of the tax year.

You can deduct allowable business expenses - things like equipment, travel, professional subscriptions, and a proportion of home office costs - before calculating your taxable profit. HMRC's Making Tax Digital (MTD) programme requires sole traders with qualifying income above 50,000 GBP to keep digital records and submit quarterly updates from April 2026.

Liability

The major drawback is unlimited personal liability. If the business incurs debts or is sued, creditors can pursue your personal assets - your home, savings, and other property. There is no legal separation between business and personal wealth.

A general partnership is the default structure when two or more people carry on a business together with a view to profit. It is governed by the Partnership Act 1890, which is still the core legislation despite its age. A general partnership has no separate legal personality - it cannot own property or enter into contracts in its own name. The partners do that individually or collectively.

Each partner is taxed individually on their share of the partnership profits through self-assessment. The partnership itself must file a partnership tax return with HMRC, but the partnership does not pay tax as an entity.

Joint and Several Liability

Every partner in a general partnership is jointly and severally liablefor the debts and obligations of the business. This means a creditor can pursue any one partner for the full amount owed, not just that partner's share. If your business partner makes a decision that creates a large liability, you are personally on the hook.

Partnership Agreement

While not legally required, a written partnership agreementis essential in practice. Without one, the default rules in the Partnership Act 1890 apply - and they may not reflect your intentions. For example, the Act assumes equal profit sharing regardless of each partner's contribution. A good partnership agreement covers profit and loss allocation, decision-making authority, what happens if a partner wants to leave, and dispute resolution.

An LLP is a hybrid structure introduced by the Limited Liability Partnerships Act 2000. It combines the organisational flexibility of a partnership with the limited liability protection of a company. An LLP is a separate legal entity - it can own property, enter contracts, and sue or be sued in its own name.

LLPs are particularly popular with professional services firms - solicitors, accountants, architects, and consultants - because they allow partners to limit their personal exposure while maintaining the internal flexibility of a partnership structure.

Formation and Compliance

You form an LLP by registering with Companies House. You need at least two designated members (equivalent to directors in a company), who take on additional filing responsibilities. Every LLP must file:

• An annual confirmation statement with Companies House
• Annual accounts (with the level of detail depending on size)
• A partnership tax return with HMRC

Members are taxed individually on their profit share, just like in a general partnership. The LLP itself does not pay corporation tax. However, HMRC can reclassify payments to members as employment income in certain circumstances under the "salaried member" rules introduced in 2014, so it is important to structure member remuneration carefully.

A private company limited by shares - commonly called an "Ltd" - is the most popular business structure in the UK for businesses that want limited liability and a clear framework for ownership and governance. As of 2025, there are over 5 million active companies on the Companies House register, the vast majority of which are Ltd companies.

Incorporation

You incorporate a limited company by registering with Companies House. You can do this online, and the process typically takes 24 hours if you use a standard model set of articles of association. You will need:

• A company name (which must not be the same as or too similar to an existing registered name)
• A registered office address in England, Wales, Scotland, or Northern Ireland
• At least one director (who must be a natural person aged 16 or over)
• At least one shareholder (can be the same person as the director)
• A statement of initial shareholdings and share capital
• Articles of association (the company's constitutional document)

Companies House charges filing fees to incorporate a company, and those fees change from time to time. Check the current Companies House fee schedule before you file, especially if you need same-day incorporation or are not using the standard digital route.

Corporation Tax

A limited company pays corporation tax on its profits. Since April 2023, the UK has operated a two-tier rate:

• 19% small profits rate for companies with profits up to 50,000 GBP
• 25% main rate for companies with profits above 250,000 GBP
• A marginal relief applies for profits between 50,000 GBP and 250,000 GBP, creating an effective rate that tapers between 19% and 25%

Director-shareholders can take a combination of salary and dividends to manage their overall tax burden. Dividends are taxed at lower rates than salary (8.75% basic, 33.75% higher, 39.35% additional rate), but they do not attract employer National Insurance, making them tax-efficient up to a point. A qualified accountant can help you find the optimal split.

Directors' Duties

The Companies Act 2006 codifies seven general duties that every director owes to the company. These are not optional - they are legal obligations that apply from the moment you are appointed:

1. Act within your powers (follow the company's articles and use powers for proper purposes)
2. Promote the success of the company for the benefit of its members as a whole
3. Exercise independent judgment
4. Exercise reasonable care, skill, and diligence
5. Avoid conflicts of interest
6. Not accept benefits from third parties
7. Declare any interest in proposed or existing transactions with the company

Directors who breach these duties can face personal liability, even within a limited company. In cases of wrongful trading (continuing to trade when the company has no reasonable prospect of avoiding insolvent liquidation), directors can be required to contribute personally to the company's assets.

Ongoing Compliance

Running a limited company involves more administrative obligations than a sole trader or partnership. You must:

• File annual accounts with Companies House (deadline depends on whether the company is private or public)
• File a confirmation statement each year and pay the current filing fee
• File a corporation tax return (CT600) with HMRC
• Keep the company records and registers that still remain required after the Companies House reforms, such as the register of members
• Notify Companies House of changes to directors, registered office, share capital, or articles

Identity verification is now part of the Companies House regime under the Economic Crime and Corporate Transparency Act 2023. Verification became available on a voluntary basis in April 2025, and from 18 November 2025 it became compulsory for new directors and PSCs, with existing directors and PSCs verifying as part of the transition process. People filing directly also need to be verified, or the filing must be made through an authorised corporate service provider.

A Community Interest Company is a special type of limited company designed for social enterprises - businesses that trade for community or social benefit rather than purely for private profit. CICs were introduced by the Companies (Audit, Investigations and Community Enterprise) Act 2004 and are regulated by the CIC Regulator.

CICs can be limited by shares or by guarantee. They must pass a community interest test, demonstrating that their activities benefit the community rather than serving a private purpose. They are subject to an "asset lock," which means company assets must be used for the community purpose and cannot be distributed freely to members or shareholders. Dividends are capped.

CICs pay corporation tax like any other limited company. They are lighter-touch than charities (no Charity Commission registration required), but they cannot access charitable tax reliefs such as Gift Aid. A CIC is a good fit if you want a recognised social enterprise brand but need the flexibility to raise investment and pay some return to investors.

Your business structure is not permanent. Many UK businesses start as a sole trader and later incorporate as a limited company once revenue grows, the risk profile increases, or outside investment becomes attractive. The most common transition is sole trader to Ltd, but partnerships also regularly convert to LLPs or limited companies.

When to Consider Restructuring

• Profits exceed 50,000 GBP: at this level, the tax efficiency of a limited company (19% corporation tax versus up to 40% income tax plus NI) starts to make a meaningful difference
• Liability exposure is growing: if you are signing larger contracts, taking on employees, or expanding into regulated areas, limited liability becomes more valuable
• You want to bring in investors: equity investment requires a share structure, which means a limited company. Schemes like SEIS and EIS offer generous tax relief to investors in qualifying limited companies
• Credibility and perception: some clients and partners prefer to work with a limited company, especially in B2B markets

Tax Implications of Restructuring

Moving from sole trader to limited company is not just an administrative change - it has tax consequences. When you transfer the business to a new company, you are effectively selling assets from yourself to a separate legal entity. Key considerations include:

• Capital gains tax: transferring assets (goodwill, equipment, stock) to the company may trigger a CGT liability, although incorporation relief under section 162 TCGA 1992 can defer this if you transfer the business as a going concern in exchange wholly or partly for shares
• Stamp duty: if property or land is transferred to the company, stamp duty land tax may apply
• VAT: if the business is VAT-registered, the transfer may qualify as a transfer of a going concern (TOGC), in which case no VAT is charged on the transfer
• HMRC notification: you must tell HMRC you have ceased trading as a sole trader and register the new company for corporation tax

Given the complexity, it is strongly advisable to work with an accountant and a business lawyer when restructuring. Getting the mechanics wrong can result in unexpected tax bills.