Each trading form has its own advantages and disadvantages. Choosing the best option depends on what you want from your business and how you’d like it to operate.
Becoming a Sole Trader is the most straightforward set up, while forming a Limited Company offers reduced responsibility for your business debts but also brings more paperwork and a range of extra legal duties.
Partnerships allow two or more people to set up in business together, sharing the risks, the work and the profits, while Limited Liability Partnerships (LLPs) are similar to normal Partnerships but also offer reduced personal responsibility for business debts.
Charities and Non-Profits are very similar company structures, but are geared towards different types of organisations.
In this guide, we’ll take you through the basics of each different company type, as well as explaining the key differences between comparable company structures:
- Sole Trader vs Limited Company
- Partnership vs Limited Liability Partnership
- Charity vs Non-Profit
- Finding your ideal company structure
Sole Trader vs Limited Company
Knowing the basics about each different company structure can help you understand whether it could be the right option for you.
Why form a Limited Company?
The main reasons people form Limited Companies are to protect themselves from personal responsibility for business debt, because they think credit will be more easily available from banks and the perception that dealing with a Limited Company is somehow safer and more reliable.
If a private company limited by shares gets into debt, the Shareholders are not personally liable for the business debts or any claims made against the company. Generally, a Limited Company structure protects the individual from being sued and personal financial risk is restricted to how much is invested in the business and any financial guarantees given to obtain finance.
Banks more readily lend to Limited Companies, and money for the business can also be raised by allowing individuals or other businesses to buy shares in the company, and employees can also have shares.
Limited Companies pay corporation tax on profits and profits distributed through dividends are generally a tax efficient means of rewarding entrepreneurs for the commercial risks they take. Limited Company owners can pay themselves a salary which is subject to PAYE in the same way as any other employees.
The company must submit annual accounts and tax returns to HMRC, plus any personal tax returns for Directors and Shareholders if they’ve taken dividends.
A set of accounts must also be sent to Companies House, making financial information about your business publicly available. Companies House also demands annual returns giving certain details on the company and its directors and shareholders. Many companies and creditors will only work with incorporated companies, for the obvious reason that they can confidently check certain financial facts through Companies House.
The name of the Limited Company must be registered with Companies House when it is formed and it cannot be identical to others. There are certain restrictions on certain sensitive company names such as ‘royal’,’ ‘institute’ or ‘group’.
To set up a Limited Company you need to create a memorandum of association and articles of association, which covers important information such as who will be running your business and where it will be based.
Why form a Sole Trader?
Setting up in business as a Sole Trader is quick and easy. Sole Traders are the sole owners of their businesses and they are personally responsible for any losses the business makes, which means your possessions, including your home could be at risk if you get into debt.
You must keep a record of the business income and outgoings and there are certain tax obligations and timetables for paying tax. You must inform HMRC within three months of becoming a Sole Trader and secure your Unique Taxpayer Reference number, or UTR.
You can still take on employees as a Sole Trader and you are generally taxed as self-employed although this is not automatically the case.
Sole trading is popular with people who want total control and unlimited responsibility for their own business and its debts.
Because you don’t have shareholders or other company directors, do not have to keep Companies House informed of your company details. However, you are still liable for taxation, so you must complete a self-assessment tax return annually.
Your company name is also not secured at Companies House. This means that another individual may register the trading name you are using, unless you also decide to reserve a company name.
Why get a reserved company name?
A reserved company name is when a non-trading company is registered at Companies House.
This can be really useful for people who aren’t ready to actually trade yet, but also for Sole Traders who want to prevent anyone else forming a Limited Company under their trading name.
This type of service typically involves a formation agent registering the company on your behalf, using their own designated director and registered office address.
That means that your Limited Company name is protected, but you won’t have to deal with company filing, accounts or changes in director details until you’re ready to take full ownership of the company and start trading.
Should I register a Sole Trader or Limited Company?
Sole Traders and Limited Companies comprise the overwhelming majority of businesses in the UK. If you are planning to start a profit making business, it is highly likely that you should choose between these two company types.
So how do you choose? Here’s a quick run-down of the big things that might influence your decision.
Only Limited Companies can have multiple owners
- If there’s more than one person in charge of the business, a Sole Trader won’t work for you. The “Sole” element is incredibly significant, and you can’t take on partners or have other directors in a Sole Trader business.
Sole Traders’ assets are not protected
- As a Sole Trader you are the company. That means if the company hits financial difficulties or is sued, so are you.
- Limited Companies are incorporated as independent legal entities. This means that if they hit financial difficulty or get sued, you are individually protected.
Sole Traders are cheaper and easier to maintain
- There are fewer statutory requirements for Sole Traders to adhere to. Unlike Limited Companies they do not have to file a confirmation statement or maintain a company register.
- Accounting is generally easier and cheaper because Sole Traders accounts are dealt with by the personal tax return of the owner. Limited Companies must submit more detailed accounts.
Limited Companies are often more tax efficient
- Remember we said tax returns were easier for Sole Traders? Well the flip side of that is that Sole Traders have limited opportunities to arrange their finances to become more tax efficient. Limited Companies have a much wider range of financial options.
- Sole Traders tend to become less tax efficient as profits grow.
Limited Companies are considered more credible
- Like it or not, Limited Companies tend to be viewed as more credible or reputable. This can help when it comes to obtaining credit and winning contracts with larger businesses
Sole Traders can be harder to sell
- Because a Sole Trader business is built around the individual, selling the business on can be very difficult – particularly if you’ve not separated your business and personal finances.
- Often accounts, licences and contracts name the individual Sole Trader so these can be hard to transfer.
- Limited Companies are entities in their own right so as long as you own the shares, you own the entity, making them much easier to sell.
Sole Traders are more private
- Sole Traders only disclose their private information including turnover and ownership to HMRC.
- Limited Company information is held on the public register indefinitely and is available to anybody – unless you use a service to keep your details private, such as a registered office address or service address.
Partnership vs Limited Liability Partnership
Why form a Partnership?
Having a Partnership means sharing the responsibility of business. When you take on partners, you might have more money and resources to invest, but you also share the risks. If things go wrong and one partner can’t pay their share of debts, the other is responsible.
Also, a partner can make binding business decisions without the consent of all partners, so you must have the highest confidence in the skills and integrity of your partners before venturing down this route.
All partnerships are based upon the Partnership Agreement, which sets out precisely how the Partnership will be run and who is responsible for what, not to mention how the proceeds will be split.
Partners are usually, but not necessarily taxed as self-employed.
Partnerships are still most commonly used by professionals, such as lawyers, accountants and dentists.
Why form a Limited Liability Partnership?
A Limited Liability Partnership (LLP) shares many of the features of a normal Partnership but also offers reduced personal responsibility for business debts.
They are very similar to Limited Companies in that they both offer a limited liability to their company’s members. However, there are two very important differences:
- A Limited Liability Partnership (LLP) is taxed as a Partnership, and can be organised as flexibly.
- LLPs don’t have directors or shareholders, but can have as many members as you choose. Members should be formally appointed at the point of formation, or by the other members at a later date.
Liability is limited to the money Partners have invested into the business and any personal guarantees they have given to raise finance.
Just like with a Limited Company, an LLP is required to make certain financial information publicly available by sending a copy of their annual accounts to Companies House. Also, annual returns need to be sent with details of the LLP and its members.
Like standard Partnerships, legal agreements need to be carefully drawn up setting out how the LLP will be run and how profits will be shared. Usually partners are self-employed, and partners should register with HMRC within three months.
LLPs are designed for the types of profession that have traditionally insisted on a Partnership format such as lawyers and doctors. For most normal trading businesses a standard Limited Company is usually preferable.
What is the difference between a Charity and a Non-Profit?
Charities promote awareness of a particular cause or issue whereas Non-Profit or guarantee companies are created to hold funds for a group or organisation such as residents’ associations or sporting clubs.
Other than that, the two are very similar in structure. The only other key difference is that as a Charity, you can register with the Charity Commission.
Charities and Non-Profits may hold funds and have bank accounts, and are required to put all profits towards their “aims and objectives”.
For Charities, that can be for the promotion of a cause, to raise awareness, or to raise funds for a specific charitable purpose.
For Non-Profits, aims and objectives might be the promotion of a sport or hobby, paying for facilities or equipment, or to cover the cost of building repairs or refurbishments.
Neither Non-Profits nor Charities have shares or shareholders, but have Members (also known as Trustees) who oversee the running of the organisation and subscribe to a nominal guarantee.
Your liability as a Trustee is limited to the nominal guarantee (which is usually around £10), and Trustees cannot be paid dividends. Every Trustee has just one vote in the company.
Still not sure about the right company structure?
Picking the right company structure can shape how your business grows and develops, so it’s important to get it right!
If you’re still unsure about whether you need a Sole Trader or Limited Company structure, then our quick and easy formation quiz could be the best way to discover the best options.
And if you’d like a little more help, or want to know more about Charities, Non-Profits, Partnerships or LLPs, then give one of our friendly advisors a phone call on 0117 330 8910, and we’ll be happy to help you discover your ideal company structure.
Why form a Limited Liability Partnership?
Limited Liability Partnerships (LLPs) face certain restrictions when it comes to equity investment. For someone to invest in an LLP, they must become a member of the partnership and take an active role in managing the business.
Limited Companies have shares which means they can sell portions of ownership in the company.
LLPs can receive loans from non-members and organisations. This arrangement allows individuals or organizations to financially support an LLP through loans. The loans need to be repaid with interest. They do not permit ownership of profit-sharing rights.
Just like a Limited Company, an LLP must report their annual accounts to Companies house and made publicly available. This includes financial information such as revenue, expenses, and profits.
LLPs (and LTD’s) must also submit a confirmation statement to Companies House each year. This form provides an overview of the structure and details of its members. This information helps Companies House keep accurate and up-to-date records.
Like partnerships, LLPs must need legal agreements to set clear guidelines for the operation of the business and how profits are shared. These agreements outline the roles, responsibilities, and rights of each partner, ensuring smooth operation and minimising potential conflicts.
Partners in LLP’s are often considered self-employed and must register at HMRC.
| Business Structure | Pros | Cons |
|---|---|---|
| Limited Company | Limited liability protection. Tax efficient at higher profit levels. | More admin and management. Higher accountancy fees. |
| Sole Trader | Simple to set up and operate. Full control of the business. | Personal liability. Less tax-efficient at higher profit levels. May be seen as less credible than a LTD. |
| Partnership | Easy to set up. Shared responsibility and expertise. More potential for raising funds. | Personal liability for partners. Potential for disputes among partners. |
| Limited Liability Partnership (LLP) | Limited liability protection. Flexibility in management and operation. Suitable for professional services | More complex to set up than a standard partnership. Must have at least two members |
What company structure is best for a Freelancer?
Best Fit: Sole Trader
Reason: As a freelancer, starting as a sole trader is often the simplest and most straightforward option. It allows complete control over your business with minimal administrative burden. However, if your freelance work carries significant risks or you’re earning at a higher tax bracket, consider a Limited Company for tax efficiency and liability protection.
What company structure is best for a Small Business Owner?
For small business owners, the decision between a Limited Company or setting up as a Sole Trader depends on the scale and risk involved in the business. A Limited Company can provide liability protection meaning your personal assets are not at risk. They usually offer tax efficiencies as profits increase.
However, if you’re starting a lower risk business and want simplicity, the Sole Trader option is often more suitable. It involves less paperwork and offers straightforward control over the business.
What company structure is best for a Professional Service Firm?
Professional service firms, like accountancy, law, or consultancy, are usually best as a Limited Liability Partnership (LLP). LLP’s combine the flexibility of partnerships with the personal asset protection of a Limited Company.
This company structure also allows partners to actively participate in management decisions. A LLP structure can be seen as more credible which is usually a very important factor.
Which company structure is best for rapid growth?
For businesses targeting rapid growth, a Limited Company structure is usually set up. This option allows scaling as it’s easier access to funding, and add shareholders. The clear separation between the owner’s personal finances and the business’s finances is another important advantage.
What are the long-term considerations for each type of structure?
Limited Company
Scalability: Easier to scale, attract investment, and sell.
Longevity: Better for transferring ownership.
Tax Planning: More options for tax planning and reinvestment.
Sole Trader
Simplicity in Scaling Down: Easier to wind down or change structure.
Personal Control: Maintains personal control but can be limiting in growth.
Tax Simplicity: Straightforward tax affairs but potentially less efficient at higher income levels.
Partnership
Shared Growth: Potential for growth through partnership but depends on the agreement’s flexibility.
Succession and Continuity: Can be complex, especially in the absence of a formal agreement.
Tax Transparency: Income is taxed as personal income, offering simplicity but less tax planning flexibility.
Limited Liability Partnership (LLP)
Professional Growth: Ideal for professional services firms looking to grow while limiting personal liability.
Flexibility in Management: Allows for flexible internal structure and profit distribution.
