Choosing the right business structure is more than a box to tick. It shapes your personal risk, how investors view you, how you pay yourself, and the day-to-day admin you’ll need to manage. Pick the right structure, and you open the door to funding and smoother growth. Pick the wrong one, and it can quickly become a headache.
This guide is for early-stage UK founders and small teams, from idea or MVP through to first hires, who want a practical, commercial shortlist of options: sole trader, partnership (including LLP), or limited company. You’ll get a clear view of the trade-offs around liability, control, tax, and admin, when it might make sense to change later, and the essential documents to have in place.
If you need advice tailored to your situation, whether that’s creating a cap table, issuing options, or rolling a sole trader into a company ahead of a contract or funding round, our corporate lawyers can help map the best route for your plans.
Jump to:
- What are the main UK business structures and when is each typically used?
- How do liability and personal risk differ by structure?
- Ownership, control and bringing others in: what changes with a company or LLP?
- Tax and pay mechanics at a glance
- Admin, compliance and costs you’re signing up to
- Funding and credibility: does structure affect investors, banks and bigger clients
- Decision framework: three questions to narrow the choice
- Can you change later, and what does it involve?
- Essential documents once you’ve chosen
- Ready to start your new company?
What are the main UK business structures and when is each typically used?
Sole trader
You trade as an individual. It’s easy to start and involves minimal admin, but you’re personally responsible for all debts and obligations. This structure is often used by solo operators testing the market or freelancing.
Ordinary partnership
Two or more people trade together. It’s simple to set up, but partners share profits and have joint and several personal liability for partnership debts, meaning each partner can be responsible for all of them. This option is common for small teams before they formalise their structure.
Limited liability partnership (LLP)
This is a hybrid structure that combines the flexibility of a partnership with limited liability for its members. It’s popular with professional services firms and some joint ventures. LLPs are registered at Companies House, and members are usually taxed individually.
Private limited company (Ltd)
A private limited company is a separate legal entity that issues shares. It offers limited liability, clearer governance, and is the standard structure for equity investment and share option schemes. Expect more compliance requirements, including filing accounts, confirmation statements, and maintaining registers.
We go into more detail about the different types of start-up business structures in our FAQ guide.
How do liability and personal risk differ by structure?
Unlimited liability (sole trader or ordinary partnership)
If you operate as a sole trader or in an ordinary partnership, business creditors can pursue your personal assets if things go wrong. In a partnership, liability is joint and several, meaning each partner can be held responsible for the full amount. As revenue and contract values grow, this becomes a significant risk.
Limited liability (LLP or Ltd)
In a limited liability partnership or private limited company, your liability is generally capped at the amount you’ve invested or personally guaranteed. However, lenders and landlords may still require personal guarantees, which override that protection. Always understand the risk before signing.
Ownership, control and bringing others in: what changes with a company or LLP?
Companies
A company has shares, shareholders, and usually directors. Shares determine both economic and voting rights, which are recorded in a statement of capital. You must also keep a register of persons with significant control (PSCs), typically anyone with more than 25% ownership, voting rights, or significant influence.
Directors must follow statutory duties, such as acting within their powers, promoting the success of the company, and exercising reasonable care.
Agreeing early on shareholder rights and decision-making processes through a shareholders’ agreement and tailored articles of association helps prevent disputes between founders and keeps your business ready for investors.
Partnerships and LLPs
In an ordinary partnership, partners run the business and are taxed individually. In a limited liability partnership (LLP), members own and manage the LLP under an LLP agreement. The LLP is a separate legal entity, but members are typically taxed individually on their share of profits.
A clear partnership or LLP agreement that covers decision-making, profit sharing, exits, and dispute resolution is essential for long-term stability. Find out about what LLP agreements are and how they are used in this article.
Tax and pay mechanics at a glance
Who pays the tax?
- Sole traders and partners or LLP members: You pay Income Tax and, where relevant, Class 2 and Class 4 National Insurance on your share of profits through Self-Assessment.
- Companies: The company pays Corporation Tax on its profits. Owners and directors then pay personal tax on any salary or dividends they receive. The current Corporation Tax system applies a main rate of 25%, with a 19% rate for small profits and marginal relief between thresholds. Associated company rules may apply, so it’s best to speak to your accountant.
Paying yourself:
- Sole trader or partner: Money you take out of the business (known as drawings) is not a business expense. You are taxed on overall profit, not what you withdraw.
- Company: Directors usually pay themselves a combination of salary (through PAYE) and dividends, which are taxed differently. Keep accurate records and check HMRC’s guidance on dividends.
VAT registration
You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period. Voluntary registration can sometimes be beneficial before you reach that threshold, so it’s worth getting advice.
Practical tip: plan your remuneration (whether that’s director salary and dividends or member drawings), your VAT position, and your allowable expenses with an accountant before you finalise your business structure.
Admin, compliance and costs you’re signing up to
Companies and LLPs
You must file annual accounts and a confirmation statement, keep your company registers up to date (including your PSC register), and respond promptly to any Companies House queries.
Since 4 March 2024, companies are required to have a registered email address (which is not made public) and an appropriate registered office address (no PO Boxes). Fees increased on 1 May 2024, for example, digital incorporation now costs £50, and a confirmation statement costs £34.
From 18 November 2025, identity verification will become mandatory for new directors and persons with significant control, with a 12-month transition period for existing companies. This verification will be completed alongside your next confirmation statement.
In a future phase, accounts will need to be filed using software only.
Find out more about the upcoming director ID verification changes in our legal update.
Sole traders
You must register with HMRC for Self-Assessment and keep accurate financial records. This option involves fewer filings and lower direct costs, but there is less separation between you and your business.
Funding and credibility: does structure affect investors, banks and bigger clients
Equity investors
Raising funds from angels, venture capital, or through SEIS/EIS tax-relieved investment usually involves issuing new shares. For this reason, you generally need a company limited by shares to attract equity investment.
You can find out about the different stages of start-up investment, from pre-seed to series A and how to prepare in our guide.
Option schemes
EMI share options are often used to attract and retain early hires. They are designed for companies that meet HMRC’s criteria, including requirements around size, independence, and qualifying trade.
If you’re planning to issue EMI options to your employees, we discuss everything you need to know in our EMI FAQs.
Banking and tenders
Having a company number, a record of accounts, and clear governance can make it easier to open business bank accounts, bid for larger contracts, or negotiate supplier credit. Even with a limited company, be aware that lenders or suppliers may still request personal guarantees.
Costs/benefits snapshot: a founder-friendly comparison
| Factor | Sole trader | Ordinary partnership | LLP | Limited company (Ltd) |
| Liability | Unlimited personal liability | Unlimited (joint & several) | Limited to capital/guarantees | Limited to shares/guarantees |
| Typical admin | Self-Assessment; basic records | Partnership tax return + each partner’s Self-Assessment | Companies House filings (accounts, confirmation statement) + Self-Assessment for each member | Companies House filings (accounts, confirmation statement), Corporation Tax, payroll if salaried |
| Setup speed/cost | Fast; HMRC registration | Fast; HMRC registration | Companies House registration; £50 digital | Companies House registration; £50 digital |
| Tax posture (signpost) | Income tax/NI on profits | Partners taxed on profit share | Members taxed on profit share | Corporation Tax in company; then salary/dividends |
| Investor readiness | Low (no shares) | Low | Medium (investors prefer shares) | High (standard for equity and EMI) |
| Privacy | No public accounts | Limited public info | Accounts, PSC and filings on public register | Accounts, PSC and filings on public register |
| Ease of exit/change | Simple to cease/transition | Dissolution can be complex | Strike off or conversion steps | Strike off/liquidation; asset/share sale options |
Fees and filings per Companies House changes effective 1 May 2024 and standard digital incorporation. Identity verification for directors/PSCs is planned from 18 November 2025.
Decision framework: three questions to narrow the choice
- How much personal risk are you taking on?
- If contract values and exposure are rising, move away from sole trader/ordinary partnership toward LLP or Ltd for limited liability.
- What are your funding and ownership plans for the next 12–24 months?
- Planning equity rounds or EMI options? You’ll almost certainly want a limited company. Bootstrapping and staying small? Sole trader/partnership can be fine (with eyes open on liability).
- What admin can you live with?
- If you want minimal filings and no public accounts, sole trader is lightest. If you can handle filings for better governance and investor readiness, Ltd is the usual winner.
Can you change later, and what does it involve?
Absolutely. Many founders start as sole traders or partnerships, then incorporate before hiring, signing major contracts or raising investment.
Key steps when moving to a company/LLP typically include:
- Incorporation at Companies House and updating HMRC registrations (Corporation Tax, PAYE, VAT).
- VAT: consider transferring your VAT number to the new entity (form VAT68) or registering anew - timing matters to avoid trading gaps.
- Employees: transferring staff to the new entity, TUPE may apply, plus payroll/PAYE changes.
- Assets/IP and contracts: assign/novate contracts, transfer IP and equipment; notify banks and insurers.
- Tax: incorporation relief and other tax consequences can arise. - coordinate with your accountant.
We’ve created a step-by-step guide on how to incorporate a business if you want to learn more.
Timing tip: aim to complete the change before signing a major customer contract or closing a funding round, so the right entity is party to those documents.
Essential documents once you’ve chosen
For companies (Ltd):
- Articles of association tailored for your governance and investor expectations.
- Shareholders’ agreement covering decision-making, vesting, exits and dispute routes.
- Director service agreements setting expectations and protections.
If you want to find out more about the specific legal documents above, read our guides on:
For partnerships/LLPs:
- Partnership or LLP agreement setting profit share, decision-making, capital, exits and dispute resolution.
These documents reduce founder disputes and keep you “investor ready” by making rights and responsibilities crystal clear.
If you want an overview of the 9 key legal documents for start-up success, we’ve also covered that for you.
When to get legal advice (and what we’ll do for you)
- You’re adding cofounders/investors or creating share classes/options (EMI).
- You’re switching from sole trader/partnership to a company/LLP ahead of a major contract or round.
- You need to grant/assign IP to the vehicle (so value sits in the right place).
- You’re arranging banking facilities that may require personal guarantees.
- You want a shareholders’ or LLP agreement to avoid future stalemates.
We discuss the importance of using a lawyer when setting up your business – it's important you make sure you’re legal foundations are solid from the start.
Ready to start your new company?
Unsure whether an LLP or Ltd is right for you, or how to switch without creating complications? Our corporate lawyers can help. We’ll review your risk profile, funding strategy, and administrative capacity, then guide you on the optimal structure, shareholder arrangements, and key company documents to set you up for growth with minimal friction.
