Choosing a business entity is one of the first decisions a new business owner will have to make, and it is a huge decision. The business entity you choose will impact the way your business is set up, the taxes you pay, your legal liability, and how much flexibility you have in the future. We recommend taking the time to think about your business goals, both short-term and long-term, before registering as a business.
6 Main UK Business Entity Types
There are a number of different business entities you could create, but these 6 are the most common. We recommend discussing your business entity choice with an attorney if your circumstances are complex.
Sole Trader
This is the most simple type of business entity, preferred by freelancers, consultants, or the self-employed. It is really easy to set up and is a great option for those starting out and dipping their toes in the water. You can hire staff as a sole trader, but they can not be appointed into CEO or director roles.
Pros
- Easy to set up with very little paperwork
- The sole trader has direct control over all decision-making
- The sole trader keeps all business profits
- Business profits are only taxed once as personal income tax (rather than the business being taxed and then your income from the business being taxed)
- Your business details are not listed on the Companies House website
Cons
- There is no liability protection, meaning both business and personal assets are accessible in lawsuits
- It can be difficult to seek loans and financing as a sole trader
- You are not able to bring new partners on in the future
Limited Company (LTD)
A limited company is a legal entity, and therefore separate from the business owners. This means that the owner can become bankrupt or be sued without it affecting the business and other shareholders. Also, the business can go bankrupt or be sued without it affecting the business owner or other shareholders. The business can be easily sold because of this separation too.
Your limited company must have at least one director, and you must issue at least one share (usually owned by the director) at the time of incorporation.
Pros
- The company is legally separate from the shareholders or business owners
- The business is more tax efficient as corporations tax is lower than personal tax
Cons
- Company details are displayed on Companies House website, details like company earnings and directors.
- The director has fiduciary duties that may need the help of an accountant or lawyer
- Incorporation fee
Partnership
A partnership is a business started by 2 or more self-employed people who will share the profits and losses of their venture. It is less formal than a limited company and does not need incorporation. If you start a partnership, you should consider hiring a lawyer to create a legally binding partnership agreement. Profits are shared out between partners and are filed as personal tax returns rather than being subject to corporate tax.
Pros
- Simple to start – you only need to register with HMRC for taxes, no need to register with Companies House
- Sharing the startup costs
- Both partners bring something to the table (knowledge, resources, or client lists)
- You will not need to share company and partner details on Companies House
- You can bring new partners on at any time
Cons
- No liability protection
- Each partner is liable for the others’ actions
Limited Liability Partnership (LLP)
This is a more formal partnership that is registered with Companies House and is treated as a separate legal entity. Each of the partners is only liable for the amount they have invested into the business. When the company is incorporated, two partners must be registered as “designated members” who are responsible for the partnership’s operations. There can be more than 2 partners in the partnership. An LLP agreement is registered at incorporation that lays out the percentage of ownership each partner has and, therefore, how profits, losses, decision-making power, and duties will be split. This agreement will also list the assets and resources each partner contributed to the business. Like an LTD, the partnership will be subject to corporation tax, and then each partner will have to file a personal tax return and contribute to National Insurance.
Pros
- Liability protection for each partner
- Flexibility in how you run the business – but needs to be decided in the LLP agreement
- The business name is protected once it is registered with Companies House
- As a legal entity, the LLP can purchase and hold assets, just like a person
- Partners can hold different titles, have different shares of the business, and have different decision-making power
Cons
- Profits need to be distributed during the tax year, they cannot be rolled over into the next year
Public Limited Company (PLC)
A public limited company is a limited company that trades shares on the stock markets. It must have 2 directors at incorporation, and £50,000 worth of shares must be issued at the time of registration. Being a PLC shows that you have large financial backing, so for many companies, choosing a PLC as the entity is a status thing or about being able to raise capital through publicly traded shares. An LTD can re-register as a PLC if they want to be publicly traded in the future.
Pros
- Easy to raise capital through shares
- Company liability is limited to its reserves
- Liquidity for shareholders who can buy or sell their interest easily
- The high profile makes it easier to raise funds through other methods
Cons
- One of the most complex entity types in terms of paperwork and contracts required to register
- One of the most expensive entities to start
- A lot of fiduciary and reporting duties
- Little control over major stakeholders as the shares are publicly traded
Limited By Guarantee (Non-Profit)
A limited by guarantee company is a non-profit business entity. Business activities will be charitable in nature, and all profits are used towards the non-profit’s charitable goals and programs. Shareholders and directors are called members, and board members are called trustees
Pros
- Members are not liable for the non-profit
- Better eligibility for government funding if your company is set up as a non-profit
- No financial obligation to pay dividends to members; all profit can go towards charitable goals
- Exemption from corporate tax for all profits earned from charitable activities
Cons
- Restrictions on the activities the non-profit can do while keeping their charity status
- Trustees (board members) cannot be paid