Which business type is best for my start-up?

There are so many things to think about when starting a business but top of the list has got to be what sort of company structure it should have. One type is not better than another – it depends on your circumstances and how you see the business developing.

There is a keen appetite for entrepreneurialism in the UK. In the first quarter of 2025 there were 4.4 million self-employed workers in the UK and more than 5 million limited companies. So, if you want to join the growing ranks of British business owners, what do you need to know about the pros and cons of each type of company structure?

The main business entities

There are three ways to go into business: as a sole trader, limited company or partnership.

Sole trader

This is a great way to get started in business. And you don’t need to give up your day job – many people start their businesses as a ‘side-hustle’ as they test the market and refine their business plan and products and services. Also you really are your own boss – it’s your business and you can run it how you want. And your financial information remains private – there are no reporting requirements apart from doing your tax return.

You don’t need a business bank account or to set up a company or think of a name or register for VAT or complete any other formalities. What you must do though is register for income tax self assessment with HMRC via the gov.uk website as all your income will no longer be through the PAYE system.

Your profits are taxed in the same way as PAYE income, so you have your £12,570 personal allowance, then a 20% rate on earnings up to £50,270 and 40% on earnings up to £125,000, and 45% thereafter.

If you anticipate initial profits will be low it could be more tax-efficient to be a sole trader because of the personal allowance, which does not exist for corporation tax.

A disadvantage of this relative simplicity is that you and the business are one entity, making you personally liable for unpaid debts. So if you think the business idea is risky a limited company structure might be wiser.

Another disadvantage is that it is usually harder to raise finance as a sole trader – potential backers are more comfortable with investing in limited companies because they have a formal structure and legal recognition unlike a one-man band who could disappear overnight.

Limited company

This main requirements for setting up a limited company are registering with Companies House and HMRC, choosing a name and choosing directors. If you prefer you can be the sole director and shareholder. You must also open a business bank account and keep accounts and company records.

Corporation tax starts at 19% and is payable on your profits, a big advantage of a limited company structure for more successful entities since this is lower than the 40% higher rate income tax that would apply to profits of more than £50,270. (Main rate corporation tax is 26% for profits above £250,000 a year.)

Furthermore, many directors pay themselves in dividends as the tax rates are lower than they are for income tax. The first £500 of dividend income is tax free, thereafter the basic rate is 8.75%, higher rate 33.75% and additional rate 39.35%. The thresholds for higher and additional rate tax are the same as for income tax.

As the company is a separate legal entity from you, you are not personally liable for its debts – a big advantage over being a sole trader or a partner. However, as a director you have legal duties and responsibilities that a sole trader does not – and can be fined for not carrying them out correctly.

Partnership

A partnership is for those who don’t want to run a business on their own. Having a partner or partners will give you the strengths and experiences of others to draw upon, which can be invaluable as it is unlikely any one person has the complete skillset to run a business successfully.

Like any relationship, a partnership can be great as long as it is going well but not if conflicts and disputes break out. Think of the amount of bands that have split up because of creative differences. You and your partner or partners will have many decisions to make as the business grows so it is important your objectives for it are as aligned as possible before you set up the partnership. Disputes will distract you from running the business, reducing profits and slowing growth.

However, ideally the process of drawing up the partnership agreement will bring to light differences between the prospective partners so unsuitable people can be avoided.

And do bear in mind partners can leave the firm at any point, subject to their contract. You may not have the ready funds to buy them out or be able to run the business without them.

You can trade under your own names or choose a name. Joint and several liability applies, which means you are personally liable in full for all losses, whether incurred by you or your partners.

Partners pay income tax so miss out on the lower rates of corporation tax and dividend tax.

Limited liability partnership

In a limited liability partnership losses are capped at the value of each partner’s investment in the business and personal assets are not at risk. This structure is common among professional services firms. Full partners have a say in the running of the business and a fair share of profits and losses.

Non-profits

Social enterprises generate income from selling goods and services rather than from grants and donations like charities.

A social enterprise is not a structure in itself rather it is a description of certain sorts of enterprises, just as not-for-profit organisation is an umbrella term. It can take the form of a company limited by guarantee, a community benefit society or a cooperative society, or at the most informal an unincorporated association.

A community interest company (CIC) is focused on providing a benefit to a community rather than on making a profit. CICs have asset locks that ensure their assets and profits are used in the community they serve. They also come with additional reporting requirements and restrictions on what activities they can undertake. A CIC cannot be transformed into a limited company but it can be converted into a charity or passed on to someone else, or of course dissolved.

A charitable incorporated organisation (CIO) combines the advantages of a charity (tax relief on business rates and VAT, for example) with limited liability for its officers. CIOs are only available in England and Wales.

This article only touches on the many issues of choosing a structure for a new business, and many people may want professional advice tailored to their situation.

To have your questions answered by experts, please contact Finsbury Robinson. We are a full-service tax, accountancy and business advisory firm, and our friendly and highly experienced team is available on 020 8858 4303 or via email at info@finsburyrobinson.co.uk