Business structures: Your guide to choosing the right one

Published Friday 3 October 2025

Table of contents

• What is a business structure?
• The risks of not choosing a business structure
• What happens if you don't choose: default business structures
• Types of business structures
• Tax implications of different business structures
• How to choose the right business structure for your small business
• Costs of setting up different business structures
• Can you change your business structure?
• Get started with the right business structure
• FAQs on business structures

Key takeaways

• Assess your personal liability risk and financial exposure when choosing a business structure, as sole traders face unlimited personal liability while limited companies provide legal protection for your personal assets.

• Consider your funding requirements and growth plans, since limited companies can issue shares to raise investment capital while sole traders and partnerships have more limited funding options.

• Evaluate the tax implications of each structure, as sole traders pay personal income tax on all profits while limited companies pay corporation tax and allow more flexible income planning through dividends.

• Plan for future changes by starting simple and upgrading your structure as your business grows, with many businesses following the path from sole trader to partnership to limited company.

What is a business structure?

A business structure is the framework that defines how your business operates, pays tax, and handles liability. It determines your personal financial risk, administrative requirements, and legal responsibilities.

The main UK business structures are:

• Sole trader: single-owner business
• Partnership: two or more owners
• Limited company: legally separate entity

The risks of not choosing a business structure

Not choosing a business structure puts you at significant risk. Without a formal structure, you face:

Financial risks:

• Personal liability: You are responsible for business debts, which can affect your personal assets
• Higher taxes: You pay tax on both personal and business income together, which can mean paying more

Growth limitations:

• Limited funding options: Investors and lenders prefer businesses with formal structures
• Limited growth: Informal structures can make it harder to expand and increase sales

What happens if you don't choose: default business structures

If you do not choose a structure, you automatically become a sole trader. You are personally responsible for all business debts and legal issues.

Types of business structures

Here's a comparison of the different types of business ownership.

What is a sole trader?

A sole trader is the simplest UK business structure where one person owns and runs the business. You can hire employees as a sole trader – the "sole" refers to ownership, not workforce size.

Advantages of being a sole trader

Key advantages:

• Simple setup: Register with HMRC online in minutes
• Easy tax filing: Report business income on your personal tax return
• Low costs: No registration fees or mandatory filings

Here's guidance on choosing accounting software for sole traders.

Disadvantages of being a sole trader

Main disadvantages:

• Personal liability: You're personally responsible for all business debts and legal issues
• Financial risk: Your personal assets (home, savings) are at risk if the business fails
• Insurance essential: You need comprehensive business insurance for protection

What is a partnership?

A partnership is a business owned by two or more people. You can divide ownership in any way you agree. One partner must be responsible for managing tax returns and keeping business records.

Advantages of a partnership

You can set up a partnership easily. Create a written agreement between partners. Tax is simple:

• The partnership files a return showing income, expenses, and tax refunds
• Each partner declares their share of profits on their personal tax return

Disadvantages of a partnership

Partners share responsibility for financial and legal matters. If one partner makes a mistake, all partners are affected.

What is a limited liability partnership?

Two or more partners own a limited liability partnership (limited liability partnership (LLP)), a structure available in the UK since 6 April 2001, and benefit from greater legal protections than people in conventional partnerships and sole traders.

Advantages of an LLP

You are protected from legal or financial issues caused by other partners. Ask your accountant or lawyer for advice. Your tax obligations are straightforward, too, as you deal with business income on your personal tax return.

Disadvantages of an LLP

Setting up an LLP costs more and involves more administration. Investors may prefer limited companies for better asset protection.

What is a limited company?

A limited company (identified by the 'limited company (Ltd)' abbreviation in the company name) is legally separate from its owner (or owners), so you're less exposed to its legal or financial issues. Unlike LLPs, which require a minimum of two members, limited companies can be established with just one member.

Advantages of a limited company

You have legal and financial protection. Speak to your accountant or lawyer for details. Shareholders can receive dividends. This gives you more control over your income and tax planning. It's also easier to raise money as you can sell shares in the company.

Disadvantages of a limited company

Operating as a company costs more than being a sole trader or partnership. You also have more administration. You'll need to know how the company will operate before you get started, and you'll have to regularly submit paperwork to Companies House.

Tax implications of different business structures

The structure you choose has a direct impact on how you report your income and pay tax. It's a key factor in your decision, as it affects both your admin and the amount of tax you'll owe.

• Sole trader: You'll pay tax and National Insurance through Self Assessment. Your business profits are treated as your personal income.
• Partnership: The partnership submits a tax return, but each partner is responsible for paying tax on their share of the profits through their own Self Assessment tax return.
• Limited company: The company pays Corporation Tax on its profits. You'll pay income tax and National Insurance on any salary you take, and tax on any dividends you receive.

Tax rules can be complex. Speak to an accountant to find the best option for you.

How to choose the right business structure for your small business

Choosing the right structure depends on four key factors that affect your business success and personal risk:

Understand your liability risks

Assess your risk tolerance:

• High-risk activities:Construction, consulting, retail – consider limited company protection
• Low-risk services: Freelance writing, tutoring – sole trader may suffice
• Valuable personal assets: If you own property or significant savings, limited liability becomes crucial

Consider your control and decision-making preferences

Decide how many people will run the business. Think about how you want to share control and decision-making.

Work out your funding needs

Match structure to funding needs:

• Self-funded or small loans: Sole trader or partnership works
• Investor funding needed: Limited company can issue shares to raise capital
• Bank loans: Companies typically access larger loan amounts than sole traders

Plan for future growth

Plan for future growth:

• : Limited companies transfer ownership more easily than sole traders
• Taking on partners: Partnerships and companies accommodate multiple owners
• Scaling operations: Companies handle complex structures, multiple locations, and employee share schemes

Costs of setting up different business structures

Setup costs depend on your business structure. Some are free, while others have registration and ongoing fees.

• Sole trader: It's free to set up as a sole trader. You just need to register for Self Assessment with HMRC.
• Partnership: This is also free to set up. Consider hiring a solicitor to draft a partnership agreement. This helps prevent disputes.
• Limited liability partnership (LLP) and limited company: You'll need to pay a fee to register your business with Companies House. You also pay ongoing costs for filing annual accounts and confirmation statements.

Can you change your business structure?

Yes, you can change your business structure as your needs evolve. Many businesses start as sole traders, then become partnerships, and later form limited companies.

Common upgrade path:

• Start: Sole trader (testing business idea)
• Growth: Partnership (bringing in co-founders)
• Scale: Limited company (protecting assets, raising investment)

When to consider changing:

• Annual turnover exceeds £85,000 (Value Added Tax (VAT) threshold)
• Taking on significant financial commitments
• Planning to raise investment or bring in partners

Get started with the right business structure

Your business structure affects your finances and legal responsibilities. Choose the one that fits your needs. Xero helps you manage your finances, so you can focus on running your business.

Try Xero for free.

FAQs on business structures

Find answers to common questions about choosing a business structure below.

What are the four main business structures in the UK?

The four most common business structures for small businesses in the UK are sole trader, partnership, limited liability partnership (LLP), and limited company. Each structure has different rules for liability, tax, and administration.

When should I change my business structure?

Change your business structure if your business grows, you take on partners, want to limit your liability, or want to be more tax-efficient.

Do I need professional help choosing a business structure?

You can choose a structure yourself, but it helps to get advice from an accountant or legal professional. They can explain each option and help you choose the best one for your goals.