Setting up in business.

Choosing a Business Structure

When starting a business, you will need to choose an appropriate legal structure.

Your choice can affect:

• personal liability for business debts;
• how profits are taxed;
• National Insurance;
• record keeping and accounts;
• how decisions are made;
• how money can be taken from the business;
• responsibility for legal compliance;
• the ability to obtain investment;
• business continuity; and
• how the business can be sold or transferred.

The main structures are:

• sole trader;
• ordinary partnership;
• limited liability partnership;
• private limited company;
• limited partnership;
• community interest company; and
• unincorporated association.

This guide provides a general overview of UK business structures. Tax and legal advice should be obtained before choosing a structure or transferring an existing business.

Sole Traders

A sole trader is an individual who personally owns and operates a business.

A sole trader can employ staff, trade under a business name and operate from more than one location. The term does not mean that the owner must work alone.

Advantages of Being a Sole Trader

Potential advantages include:

• a relatively simple setup;
• fewer public filing obligations;
• direct control over decisions;
• the ability to retain profits after tax; and
• greater privacy than a registered company.

Personal Liability

A sole trader and the business are not legally separate.

The owner is personally responsible for:

• business debts;
• contracts;
• claims against the business;
• tax liabilities;
• employee obligations; and
• other legal responsibilities.

Personal assets may be at risk if the business cannot pay what it owes.

Registering as a Sole Trader

A person who needs to report self-employed income must register for Self Assessment with HM Revenue and Customs.

The normal registration deadline is 5 October following the end of the tax year in which the person started trading and became liable to submit a return.

A sole trader must generally:

• keep business and expense records;
• submit Self Assessment tax returns;
• pay Income Tax on taxable profits;
• pay applicable National Insurance contributions;
• register for VAT when required;
• operate PAYE when employing staff; and
• comply with legal and regulatory obligations.

A sole trader may choose to open a separate business bank account, although this is not normally a legal requirement. Keeping business and personal transactions separate can make accounting and tax administration easier.

Ordinary Business Partnerships

An ordinary partnership arises where two or more people carry on a business together with a view to profit.

The partners normally share responsibility for:

• running the business;
• making decisions;
• business debts;
• contracts;
• losses; and
• profits.

A partnership does not generally provide limited liability. Partners can be personally responsible for debts and obligations incurred by the partnership.

Joint Liability

A partner may be liable for business debts and for certain actions taken by another partner within the partnership's authority.

A creditor may sometimes pursue one partner for the entire partnership debt, leaving that partner to seek contributions from the others.

Registering a Partnership

The partners must choose a nominated partner and register the partnership with HMRC.

The nominated partner is generally responsible for:

• maintaining partnership records;
• submitting the partnership tax return; and
• providing information showing how profits or losses are allocated.

Each partner must normally register for Self Assessment and pay tax on their share of the profits.

Partnership Agreements

A written partnership agreement is strongly recommended.

It can address:

• how much each partner contributes;
• ownership of business assets;
• profit and loss sharing;
• decision-making powers;
• management responsibilities;
• drawings and salaries;
• working commitments;
• admission of new partners;
• retirement or expulsion;
• illness or incapacity;
• death of a partner;
• restrictions on competing businesses;
• dispute resolution; and
• dissolution of the partnership.

Without an agreement, statutory partnership rules may apply and produce results the partners did not intend.

Limited Liability Partnerships

A limited liability partnership, or LLP, combines features of a partnership and a limited company.

An LLP:

• is a separate legal entity;
• must be registered at Companies House;
• can own property and enter contracts;
• can continue despite changes in membership;
• must file accounts and confirmation information; and
• normally provides its members with limited liability.

Members are generally taxed individually on their shares of the LLP's profits, rather than the LLP paying Corporation Tax as an ordinary limited company would.

Tax treatment can differ where members do not meet the conditions for genuine self-employed status.

LLP Members

An LLP must normally have at least two designated members.

Designated members have additional legal responsibilities, including duties relating to:

• accounts;
• Companies House filings;
• confirmation statements;
• registration of changes;
• appointing an auditor where required; and
• dealing with theLLP'ss dissolution.

LLP Agreements

An LLP agreement may cover:

• capital contributions;
• profit allocation;
• management powers;
• voting;
• duties of members;
• admission and retirement;
• restrictive covenants;
• expulsion;
• death or incapacity;
• disputes; and
• winding up.

Limited liability does not necessarily protect a member against liability for their own wrongdoing, fraud, personal guarantees or conduct giving rise to personal responsibility.

Private Limited Companies

A private limited company is a separate legal person from its shareholders and directors.

The company can:

• own assets;
• enter contracts;
• employ staff;
• borrow money;
• bring or defend legal proceedings;
• make profits or losses; and
• continue despite changes in ownership or management.

The company's finances must be kept separate from the personal finances of its directors and shareholders.

Companies Limited by Shares

Most commercial private companies are limited by shares.

The shareholders own the company through their shares. Their liability is normally limited to any amount unpaid on those shares.

This protection may not apply where a shareholder or director:

• gives a personal guarantee;
• acts fraudulently;
• receives unlawful distributions;
• continues wrongful trading in insolvency;
• breaches legal duties; or
• incurs a separate personal liability.

Shareholders and Directors

Shareholders own the company. Directors manage it.

The same person can be both a shareholder and a director, and a private company can usually be formed with one shareholder and one director.

The company's articles of association and any shareholders' agreement govern how important decisions are made.

Company Directors' Duties

Directors are legally responsible for managing the company and ensuring that it complies with applicable laws.

General statutory duties include:

• acting within the company’s powers;
• promoting the success of the company;
• exercising independent judgment;
• using reasonable care, skill and diligence;
• avoiding conflicts of interest;
• not accepting improper benefits from third parties; and
• declaring interests in proposed or existing transactions.

Directors must also ensure that the company:

• keeps proper records;
• prepares annual accounts;
• files accounts and confirmation statements;
• submits Company Tax Returns;
• pays Corporation Tax;
• registers relevant changes;
• operates PAYE where required; and
• complies with employment, health and safety, data protection and regulatory law.

Directors may use accountants, solicitors and other advisers, but delegating work does not remove their ultimate responsibility.

Directors and Self Assessment

Being a company director does not automatically mean that the individual must submit a Self Assessment return solely because they are a director.

A return may still be required because of dividends, untaxed income, self-employment, capital gains, high income or another reason specified by HMRC.

Setting Up a Limited Company

A company must be incorporated through Companies House.

Information will generally include:

• the company name;
• the registered office;
• the directors;
• the shareholders or guarantors;
• the share structure;
• people with significant control;
• the articles of association; and
• the company's intended activities.

Once incorporated, Companies House issues a certificate of incorporation showing the company number and formation date.

The company must then address matters including:

• Corporation Tax registration;
• business banking;
• accounting records;
• PAYE;
• VAT where required;
• insurance;
• licences;
• employment contracts; and
• data protection registration where applicable.

Company Tax and Taking Money Out

A limited company normally pays Corporation Tax on its taxable profits.

A director or shareholder may receive money through:

• salary;
• dividends;
• reimbursement of genuine business expenses;
• pension contributions;
• repayment of money lent to the company; or
• other properly authorised transactions.

Company funds do not belong to the directors or shareholders personally.

Dividends can normally be paid only from available distributable profits and must be properly authorised and recorded.

Directors' loans can create tax and company-law consequences and should be recorded accurately.

< h3> Shareholders' Agreements

Companies with more than one shareholder should consider a shareholders' agreement.

It may cover:

• ownership percentages;
• appointment of directors;
• decision-making;
• funding obligations;
• dividend policy;
• transfer of shares;
• rights of first refusal;
• death or incapacity;
• employee shareholders leaving;
• minority protection;
• deadlock;
• confidentiality;
• restrictive covenants; and
• sale of the company.

Relying solely on standard articles may leave important commercial issues unresolved.

Companies Limited by Guarantee

A company limited by guarantee typically has members rather than shareholders.

Members agree to contribute a specified amount if the company is wound up.

This structure is often used for:

• clubs;
• membership organisations;
• charities;
• trade associations;
• sports bodies; and
• not-for-profit organisations.

A company limited by guarantee is not automatically a charity or exempt from tax.

Public Limited Companies

A public limited company, or PLC, is a company permitted to offer shares to the public, subject to company and financial-services law.

A PLC's shares do not have to be listed or traded on a stock exchange.

Public companies are subject to additional requirements concerning:

• minimum allotted share capital;
• directors;
• company secretaries;
• accounts;
• audits;
• capital maintenance; and
• public offers of securities.

This structure is rarely suitable for a small start-up.

Unlimited Companies

An unlimited company does not provide members with the ordinary protection of limited liability.

Members may be required to contribute towards company debts if it is wound up.

Unlimited companies are uncommon and should not be formed without specialist legal and tax advice.

Limited Partnerships

A limited partnership is different from both an ordinary partnership and an LLP.

It must normally have:

• at least one general partner; and
• at least one limited partner.

The general partner manages the business and has unlimited liability for its debts.

A limited partner's liability is normally restricted to their contribution. Still, they must not take part in management in a way that removes that protection.

Limited partnerships must be registered with Companies House and are often used for investment structures rather than ordinary small businesses.

Community Interest Companies

A community interest company, or CIC, is a limited company established to benefit the community rather than primarily generate private profit.

A CIC is subject to:

• a community interest test;
• an asset lock;
• additional reporting obligations; and
• regulation by the CIC Regulator.

A CIC can be limited by shares or guarantee.

It is not the same as a registered charity and does not automatically receive charitable tax treatment.

Unincorporated Associations

An unincorporated association may be formed when a group of people agrees to pursue a common non-commercial purpose.

It is often used for:

• clubs;
• community groups;
• sports associations;
• campaigning groups; and
• small voluntary organisations.

The association does not usually have a separate legal identity.

Committee members or individuals entering into contracts may become personally responsible for debts and liabilities.

A written constitution should address:

• the organisation's purpose;
• membership;
• committee powers;
• meetings and voting;
• banking;
• use of funds;
• conflicts of interest;
• disciplinary matters; and
• dissolution.

VAT Registration

As of July 2026, a business must normally register for VAT where its taxable turnover exceeds £90,000 over a rolling 12-month period.

Registration is also required where the business expects taxable turnover to exceed £90,000 within the next 30 days alone.

The threshold applies to taxable turnover, not profit.

A business below the threshold may register voluntarily. This may be useful where customers are VAT-registered or the business incurs substantial VAT on costs, but it also creates pricing and administrative obligations.

VAT registration rules can be different for:

• businesses not established in the UK;
• international sales;
• imports and exports;
• digital services;
• online marketplaces;
• groups of connected businesses; and
• businesses that split activities artificially.

Employing Staff

All business structures can employ staff.

An employer may need to:

• register for PAYE;
• check the right to work;
• provide written employment particulars;
• pay at least the applicable minimum wage;
• operate payroll deductions;
• provide payslips;
• arrange employers’ liability insurance;
• comply with working-time and holiday rules;
• meet workplace pension duties;
• protect health and safety; and
• avoid unlawful discrimination.

Directors may also be employees, depending on their contractual and working arrangements.

Business Names

A business name must not:

• mislead the public;
• suggest official approval without permission;
• use restricted or sensitive words without authority;
• infringe another person’s trade mark;
• amount to passing off; or
• breach company-name rules.

Registering a company name does not automatically provide trade mark protection.

Before adopting a name, consider checking:

• Companies House;
• the UK trade mark register;
• domain names;
• social media names; and
• existing businesses trading under similar names.

Licences and Regulatory Approval

Some activities require a licence, registration or professional approval.

Examples include:

• food businesses;
• alcohol sales;
• childcare;
• financial services;
• consumer credit;
• transport;
• private security;
• property agency work;
• health and social care;
• gambling;
• waste handling; and
• regulated professional services.

Planning permission, business rates registration, or consent from a landlord or mortgage lender may also be required.

Business Insurance

Depending on the business, insurance may include:

• employers’ liability;
• public liability;
• professional indemnity;
• product liability;
• buildings and contents;
• business interruption;
• cyber insurance;
• directors’ and officers’ insurance; and
• commercial vehicle cover.

Insurance does not replace compliance with legal duties, and exclusions and excesses should be checked carefully.

Data Protection

A business handling personal information must comply with UK data protection law.

This may involve:

• identifying a lawful basis for processing;
• providing privacy information;
• keeping information secure;
• responding to data-subject requests;
• using appropriate supplier contracts;
• reporting qualifying data breaches;
• retaining information only as long as necessary; and
• paying the data protection fee where required.

Changing Business Structure

A business can change structure as it develops.

For example, a sole trader or partnership may transfer the business to a limited company.

A transfer may involve:

• sale or transfer of assets;
• customer and supplier contracts;
• employees;
• property or leases;
• intellectual property;
• licences;
• VAT registration;
• tax elections;
• capital gains tax;
• stamp taxes;
• banking facilities; and
• personal guarantees.

A company is not simply a new name for an existing sole trader business. It is a separate legal entity, so assets and contracts may need to be transferred formally.

Choosing the Right Structure

Relevant considerations include:

• the financial risk involved;
• whether personal assets require protection;
• expected profits;
• tax treatment;
• administrative cost;
• whether there will be several owners;
• how decisions will be made;
• the need for outside investment;
• how profits will be withdrawn;
• business continuity;
• customer expectations;
• regulatory requirements; and
• future sale or succession plans.

Limited liability can be valuable, but incorporation also entails filing, accounting, and governance responsibilities.

Tax should not be the only consideration.

The structure should reflect the legal, financial and commercial risks of the business.

How a Business Solicitor Can Help

A commercial solicitor may assist with:

• choosing a business structure;
• forming a company or LLP;
• partnership agreements;
• LLP agreements;
• shareholders’ agreements;
• articles of association;
• director and shareholder rights;
• business purchases and transfers;
• commercial contracts;
• terms and conditions;
• intellectual property;
• commercial property and leases;
• employment contracts;
• regulatory compliance;
• disputes between business owners;
• investment arrangements;
• business succession; and
• closing or selling a business.

Finding a Business Solicitor

The right business structure can limit risk, clarify ownership and provide a practical foundation for future growth. The wrong structure can create unexpected personal liability, tax costs and disputes between owners.

Before starting or restructuring a business, consider obtaining advice from both a commercial solicitor and an accountant or tax adviser.

Use the search facility at the top of this page to find a business solicitor who can advise on business structures, company formation, partnerships and commercial agreements.

This guide provides general information about UK business structures. It does not constitute legal, accounting or tax advice and should not replace advice about a particular business.