The three structures most founders choose between
In the UK, the vast majority of new founders pick one of three structures: sole trader, limited company, or partnership. Each changes who is liable for the business's debts, how profit is taxed, and how much admin you carry.
Sole trader
You and the business are legally the same person. This is the simplest and cheapest way to start.
- Liability: unlimited. Your personal assets are exposed if the business owes money.
- Tax: you pay Income Tax and National Insurance on your profits through Self Assessment.
- Admin: low. Register for Self Assessment with HMRC and keep records of income and expenses.
- Best when: you are testing an idea, income is modest, and the risk of large debts or claims is low.
Limited company
The company is a separate legal entity that you own through shares and usually run as a director.
- Liability: limited to what you invest or personally guarantee. Your personal assets are generally protected.
- Tax: the company pays Corporation Tax on its profits. You then draw money as a salary, dividends, or both, each taxed differently in your own hands.
- Admin: higher. You file accounts and a confirmation statement with Companies House and a Corporation Tax return with HMRC every year, and company details are on the public register.
- Best when: you want liability protection, expect meaningful profit, want to raise investment, or clients expect to contract with a company.
Partnership
Two or more people run a business together. An ordinary partnership works much like several sole traders sharing profits, with each partner personally liable. A limited liability partnership (LLP) gives the partners limited liability but must register with Companies House.
- Best when: several people are going into business together and want a shared, flexible arrangement.
How the tax differs in practice
As a sole trader you are taxed on all profit as personal income, so your bill rises with your Income Tax band. A limited company pays Corporation Tax first, and you decide when and how to extract the rest, which can be more efficient at higher profit levels but adds paperwork.
Corporation Tax is not a single flat number. A small profits rate applies to lower profits, a main rate applies above an upper threshold, and marginal relief tapers between the two. Check the current rates and thresholds on GOV.UK before you model your numbers, because they change at fiscal events.
A simple way to decide
- If you are proving an idea with low income and low risk, start as a sole trader. You can incorporate later.
- If you need liability protection, expect solid profit, or want outside investment, form a limited company.
- If you are starting with co-founders, decide between a partnership, an LLP, or a limited company with a shareholders' agreement.
When the decision is finely balanced, the deciding factors are usually liability exposure and whether the extra admin of a company is worth the tax flexibility for your expected profit.