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<p>Every entrepreneur will at some point need to consider which legal structure is right for their business. This is an important step in every entrepreneur’s journey that will determine the running of their business, their individual liability, and crucially, how their business will grow and develop over time.</p>
<p>In this article, we explore and break down the most popular legal structures for businesses in the UK. Each legal structure comes with its own pros and cons, and there’s no one-size-fits-all solution. It’s vital that entrepreneurs choose the best-suited legal structure for the needs of their business and this may require taking advice at an early stage.</p>
<h2>What is the legal structure of a business?</h2>
<p>The legal structure of a business determines how it operates, how it is taxed and its legal obligations. It defines the relationship between the owners of the business, its management, their liabilities, and the authorities they must report to, such as HMRC and Companies House in the UK.</p>
<p>When choosing a legal structure, it’s important to consider:</p>
<ul>
<li>Levels of risk (i.e. what’s your risk appetite?)</li>
<li>Whether you need the business to hold its own assets and enter into contracts in its own name;</li>
<li>Tax obligations</li>
<li>Plans for growth (including future investment and funding plans).</li>
</ul>
<p>It’s also worth thinking about who has responsibility for the business and what’s most suitable from an administrative perspective, as well as profit distribution and whether the business structure allows for charitable status.</p>
<h3>Different types of UK business structures</h3>
<p>Several different types of organisations can be used to house a business. Some businesses begin with individuals operating as sole traders who later establish a private limited company, while others may start out as a private limited company from their inception.</p>
<p>It’s important to decide on the most suitable business structure to ensure that the business and its owners are adequately protected from both legal and financial repercussions. To do this, business owners must ensure they are familiar with the legal status of each form of organisation.</p>
<h4>Sole trader</h4>
<p>A sole trader is a self-employed individual who runs and owns the entire business. The business is not a separate legal entity. It therefore does not need to be registered at Companies House, so it does not have some of the administration and compliance requirements associated with running a company. However, the business owner remains personally liable for the business’s debts and obligations, which could potentially pose significant financial risk. There is no separation of their personal assets and the assets of the business, so all would be at risk if the business became insolvent (technically, the individual would be bankrupt).</p>
<p>Sole traders do not pay corporation tax. They pay income tax on their profits, and – depending on the level of their profits – may also have to pay national insurance (NI) contributions.</p>
<p>While sole traders are self-employed individuals, they can employ staff provided they comply with HMRC and employment law obligations.</p>
<h4>Private limited company</h4>
<p>There are <a href="https://www.gov.uk/government/statistics/companies-register-activities-statistical-release-2022-to-2023/companies-register-activities-2022-to-2023" target="_blank" rel="noopener">over 5 million private limited companies registered in the UK</a>, with 95% of these being private companies limited by shares. These companies must contain ‘Limited’ or the abbreviated suffix ‘Ltd.’ at the end of their name.</p>
<p>Among other things, private limited companies are popular because they offer shareholders limited liability in the event of the company being wound up.</p>
<p>We outline the two types of private limited companies below.</p>
<h5>Private company limited by shares</h5>
<p>A private company limited by shares is a legal entity in its own right. That is, the company has its own separate legal personality, meaning it can enter into contracts, own assets and sue and be sued in its own name. The owners of the company, its shareholders, have limited liability, which means their liability is limited to the value they have agreed to pay for the shares they hold. Their personal assets are separate from those of the company and generally would not be at risk if the company became insolvent.</p>
<p>A company is managed by its directors. For smaller and start-up companies, the directors and the shareholders are often the same individuals (owner-managed businesses), but their responsibilities and duties are different depending on the capacity in which they are acting. For more established businesses, the shareholders and directors may be two distinct groups, and it is often advisable to document the procedures to manage the interests and responsibilities of these two groups (either within articles of association or a shareholders agreement).</p>
<p>With shareholders’ risks restricted to their investment amount, this business structure can be an attractive option for businesses planning to scale by raising funds by issuing shares to new investors (who will be comforted by the limitation of liability).</p>
<ul>
<li>See also: <a href="https://linnearcms.wpenginepowered.com/resources/uk-corporate-law-overview-part-1/">UK corporate law: overview (part 1)</a></li>
<li>See also: <a href="https://linnearcms.wpenginepowered.com/resources/how-to-issue-shares-in-your-company/">How to issue shares in your company</a></li>
<li>See also: <a href="https://linnearcms.wpenginepowered.com/resources/what-data-privacy-notice-why-important/">What is a data privacy notice and why is it important?</a></li>
</ul>
<h5>Private company limited by guarantee</h5>
<p>As above, this type of company is established as a legal entity in its own right and has its own separate legal personality. The liability of members of a private company limited by guarantee is limited to the amount they have agreed to contribute in the statement of guarantee. Generally, all profits are invested back into the company.</p>
<p>Generally, private companies limited by guarantee are not-for-profit organisations, charities, right to manage companies, and community projects.</p>
<h4>Partnership</h4>
<p>Partnerships are business structures where two or more individuals share responsibility, profits and liabilities. Partnerships operate under a partnership agreement outlining financial and operational arrangements.</p>
<p>Partnerships in the UK can take three main forms: general partnerships (GPs), limited partnerships (LPs), and limited liability partnerships (LLPs), each with distinct liability structures and legal obligations:</p>
<h5>General partnerships</h5>
<p>GPs are governed by the <a href="https://www.legislation.gov.uk/ukpga/Vict/53-54/39/contents" target="_blank" rel="noopener">Partnerships Act 1890</a>. GPs are quick to set up without registration requirements, but they do not have separate legal personality and they expose all partners to joint and several personal liabilities for business debts. This means that one partner can potentially become liable for another partner’s debts, so this type of arrangement requires a great deal of trust in the other partners.</p>
<h5>Limited partnerships</h5>
<p>LPs are regulated by the <a href="https://www.legislation.gov.uk/ukpga/Edw7/7/24/contents" target="_blank" rel="noopener">Limited Partnerships Act 1907</a>. They distinguish between general partners with unlimited liability and limited partners whose liability is capped at their investment. LPs require registration at Companies House but do not have separate legal entity status.</p>
<h5>Limited liability partnerships</h5>
<p>Created by the <a href="https://www.legislation.gov.uk/ukpga/2000/12/contents" target="_blank" rel="noopener">Limited Liability Partnership Act 2000</a>, LLPs are separate legal entities providing limited liability to all members, requiring registration and filings at Companies House. LLPs share similarities with private limited companies but differ in structure, taxation and operational transparency.</p>
<h3>Factors to consider when choosing a business structure</h3>
<p>When deciding what legal structure to choose, it’s worth considering the following questions:</p>
<ul>
<li>What’s your appetite for legal liability and risk? If protecting personal assets from business debts is a priority, limited liability structures are preferable over sole traders and partnerships, where owners are personally responsible for liabilities.</li>
<li>What would be the most tax-efficient structure for your business? The answer to this question will depend on how much profit you expect to make from your business, as well as how you anticipate your business growing in the future. Sole traders, for example, pay income tax via self-assessment, while limited companies pay corporation tax. And LLPs benefit from both worlds, as members are taxed as self-employed but enjoy liability protection. With regards to tax structuring, if you are unsure, you should always discuss with a tax adviser.</li>
<li>How much time can you set aside to handle paperwork? Sole traders and partnerships require minimal paperwork, while limited companies must comply with Companies House filings, annual accounts and corporation tax filings.</li>
<li>How would you like your business’s decisions to be made? A sole trader will have full control over business decisions, whereas a limited company will require roles to be defined and often documented in a written agreement (such as a shareholders agreement)</li>
<li>How do you plan on funding and scaling your business? A limited company is generally more attractive to investors and lenders as it has shares that can be issued for investment, unlike sole traders or partnerships, which rely on personal or debt funding.</li>
</ul>
<h3>How to legally register your business</h3>
<h4>HMRC, Companies House and company formation agents</h4>
<p>Once a decision has been made about what corporate structure is best for the business, the business is ready to be registered to get up and running.</p>
<p>Sole traders must register with HMRC for self-assessment, and the process is free and simple. It usually takes around 15 days to be provided with a unique taxpayer reference (UTR).</p>
<p>Registering as a limited company, partnership or LLP, however, is slightly more complex. Limited companies need to appoint directors and submit articles of association to Companies House, and it costs £50 to £71 to register, depending on whether submitting the form online or by post. Partnerships must register with HMRC, while LLPs require Companies House registration.</p>
<p>Company formation agents, such as our sister companies <a href="https://www.1stformations.co.uk/" target="_blank" rel="noopener">1st Formations</a>, <a href="https://www.rapidformations.co.uk/" target="_blank" rel="noopener">Rapid Formations</a> and <a href="https://www.qualitycompanyformations.co.uk/" target="_blank" rel="noopener">Quality Company Formations</a>, can simplify the process by handling paperwork and compliance requirements.</p>
<h4>Essential documentation and compliance requirements</h4>
<p>Each business structure has specific compliance requirements for small businesses, including:</p>
<ul>
<li>Filing annual accounts (Ltd, LLP)</li>
<li>VAT registration if turnover exceeds the threshold</li>
<li>PAYE registration if hiring employees</li>
</ul>
<h3>Choosing the best legal structure for your business</h3>
<p>Choosing the right legal business structure requires careful consideration of your long-term goals, risk appetite and financial plans. Consulting legal and financial experts at an early stage ensures you select the most suitable structure for your needs.</p>
<p>Whether you need assistance registering a sole trader versus a limited company or exploring business structures in the UK, Linnear Legal&#8217;s expert team of <a href="https://www.linnearlegal.co.uk/corporate/" rel="noopener">corporate lawyers</a> can guide you toward an informed decision that benefits your business in the long run.</p>


How to choose the best legal structure for your business

Discover the pros and cons of different types of UK legal business structures to help choose the right one for your company.

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