Company Formation: Choosing The Right Business Structure

An overview of the most common types of business structure.

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Share this article

An overview of the most common types of business structure.


Company Formation: Choosing The Right Business Structure

An overview of the most common types of business structure.

Share this article

Whether you are starting a new business or growing an existing one, selecting the right business structure is an important decision for every entrepreneur to make, requiring careful consideration.

A business structure refers to the legal status of your business. It has implications for the tax you will pay on your profits and how you will pay it, your liability for business debts, your degree of control over the business, as well as other operational factors.

Given the wide variety of implications depending on which structure you select, it is crucial that you choose a business structure that supports your requirements and objectives, ensuring the business’ long-term success.

There are many types of legal structures available and below, we consider some of the most common ones, along with their associated benefits and drawbacks.

Sole trader

Many small businesses opt for a sole trader structure. This means that you are the sole owner of your business with complete control over its operations and decision-making.

This structure is quite straightforward and accessible with minimal administration requirements. In terms of taxation, you are entitled to keep your profits after tax, and will have to register with HM Revenue & Customs [HMRC] for Self-Assessment and National Insurance contributions if the amount you earn as a sole trader in a single tax year is more than the £1,000 Trading Allowance.

It is important to note that, while being a sole trader grants high levels of control over your business, legally, no distinction is made between you as an individual and the business, meaning that you are personally liable for any debt accrued by your business. Further, this unlimited liability means your assets are not protected from business debts, which could put your personal finances at risk.

Those operating small ventures with low risk are suited to the sole trader structure, such as freelance consultants, or specialist service providers such as hairdressers or electricians, but this is less suitable for larger, or higher-risk businesses.

Limited Company

Being one of the most flexible business structures available, limited companies are very common. There are two kinds of limited companies, public and private. Public limited companies are listed on the stock exchange with company shares traded publicly. Here, we will focus on the more common private limited company structure, which are not listed on the stock exchange.

A private limited company means your business exists as a separate legal entity from its directors and shareholders. The company as a legal entity is therefore liable for its debts, with shareholder liability limited only to the amount invested in the company. This structure provides significantly more protection in regard to the personal assets of directors and shareholders.

In terms of taxation, a private limited company structure means that profits generated belong to the business, and directors and shareholders must decide how they will pay themselves. Limited Companies must also register with Companies House, who will in turn notify HMRC. This structure allows profits to be extracted in a tax-efficient manner.

There are, however, more complex reporting and filing requirements for a private limited company, as well as both initial and ongoing formation and administration costs, which must be considered when opting for this structure. It is also important to bear in mind that private limited companies are subject to tighter governance rules, which include maintaining detailed company records, making enacting changes to the business a less direct task.

While it comes with additional costs and specific administrative requirements, the greater degree of protection afforded by a private limited company status makes it well-suited to many types of businesses, both large and small.


Partnerships are one of the most common business structures. They are a relatively simple and flexible structure and will arise when two or more people carry on a business concern.

Usually, those wishing to operate under a partnership will have a ‘partnership agreement’ in place to formally to define the roles of each partner and their share of profit. In the event that no express partnership agreement is in place, the provisions of the Partnership Act 1890 will apply by default.

Similarly to sole traders, a partnership has no legal existence distinct from the partners themselves. Therefore, if one of the partners resigns, dies, or becomes bankrupt, the partnership will be dissolved automatically.

In any event, each partner may be held liable for the actions of the other [known as ‘joint and several liability’]. This means if one partner executes an agreement without the knowledge of the other partners, the other partners are still obligated to perform the terms of that agreement.

As the formation of a partnership does not create a separate legal personality from its partners, joint and several liability is of particular concern in respect to any debts incurred by the partnership – as a partner’s personal assets may be at risk. However, an advantage of partnerships is that they do not pay income tax, and all profits and losses are passed through to the individual partners.

A general business partnership tends to suit founding teams who want to keep things as simple as possible, are comfortable with being on equal footing with one another, and do not feel the need to have lots of legal protection in place.

Limited liability partnership

There are several partnership business structures that companies may opt for when forming their business, but one of the most popular is a limited liability partnership [LLP].

The main advantage of this structure is that it combines the flexibility of a partnership structure with the limited liability of a limited company. As with a limited company, an LLP limits the personal liability of incurred business debts to the amount they have invested personally.

Setting up an LLP requires at least two partners to be designated members who are responsible for filing annual accounts, though the overall number of partners allowed is not limited. Each partner involved in the LLP must register as self-employed with HMRC as each partner’s share of profit is taxed as income, and the LLP must also be registered with Companies House. Partners should also have an agreement in place that details how profits generated are to be shared between members.

The flexibility offered by this structure, including the ability to take on new partners as the business grows without the administrative burden of a private limited company, make it an excellent choice for many industry professionals such as solicitors, medical practitioners, and accountants.

Final thoughts

Selecting the right business structure provides the legal foundation for you to operate your business with confidence, and gain clarity on liability, taxation, decision making and day-to-day operations.

It is important to look at your long-term goals for your business, your potential risk and liabilities, and consider the relevant legal advice so that you can make an informed decision when choosing the most appropriate structure for your venture.

Yulia Barnes is founder and managing partner of Barnes Law.

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Company Formation: Choosing The Right Business Structure

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