In the UK you'll usually pick between three structures: sole trader, partnership, or limited company. None is universally 'best' — the right one depends on your appetite for risk, the size of your profits, and whether you plan to bring on investors or employees.
Quick answer
Your structure decides how you're taxed, how much paperwork you do, and who's personally on the hook if things go wrong. Get it right early. Start with the first checklist items below, then verify any registration, tax or compliance step against the official sources linked on this page.
Section 01
Sole trader
The simplest setup in the UK and by far the most common starting point. You are the business: every pound of profit is yours, but every debt is too. You register for Self Assessment with HMRC, file a tax return each January, and that's largely it. Roughly 56% of UK businesses are sole traders — overwhelmingly freelancers, consultants, tradespeople, and side-hustles where the personal-liability risk is low and the admin overhead of a company isn't justified.
- Cheapest and quickest to set up — usually free, fully online via GOV.UK
- Pay Income Tax + Class 2 and Class 4 National Insurance on profits
- Personally liable for debts — your home, car and savings are theoretically at risk
- Less administrative burden, one annual tax return, no public filings
- Easier to wind down — just stop trading and tell HMRC at your next return
Section 02
Limited company (Ltd)
A limited company is a separate legal entity, formed at Companies House for £50 online. Your personal liability is normally limited to whatever capital you put in (often as little as £1). The trade-off is more administration: annual statutory accounts, an annual Confirmation Statement, a Corporation Tax return, and PAYE if you draw a salary. At around £30,000+ of profit a Ltd often becomes more tax-efficient than sole trader status, particularly when profits are taken as a mix of small salary and dividends.
- Limited personal liability — protects your home and savings if the business fails
- Pay Corporation Tax (19%–25%) plus Income Tax on the salary and dividends you take
- Public records: directors, registered office and accounts visible on Companies House
- Required to use SEIS/EIS to attract UK angel investment
- Often a procurement requirement when selling B2B to larger clients
- Most accountants recommend incorporating once profits regularly exceed £30k
Section 03
Partnership & LLP
Two or more people running a business together. An ordinary partnership works like a multi-person sole trader — partners share profits and are jointly liable for debts, even ones a co-partner has personally racked up. An LLP (Limited Liability Partnership) gives you the liability protection of a limited company without the corporate ownership structure, and is the standard structure for UK law firms, architects and consultancies. Both need a written Partnership Agreement — verbal arrangements between friends are the single most common source of devastating business disputes we see.
- Ordinary partnerships: easy to start, dangerously risky without a written agreement
- LLPs: file accounts at Companies House, members are taxed personally on their share of profits
- Always agree, in writing: profit splits, decision-making, what happens if someone leaves
Section 04
Less common: CIC, charity, sole-shareholder PLC
If your purpose is social rather than commercial, look at a Community Interest Company (CIC) — a Ltd with a regulated 'asset lock' that prevents profits being diverted from the social mission. Registered charities have their own framework and trustee duties through the Charity Commission. A Public Limited Company (PLC) requires £50,000 of issued share capital and is realistically only relevant if you intend to list on a stock exchange.
Section 05
Registering with HMRC and Companies House
Sole traders register for Self Assessment on GOV.UK and receive a UTR (Unique Taxpayer Reference) by post within around ten working days. Limited companies are incorporated at Companies House — you'll choose a unique name, a registered office address (which is public), directors, shareholders and an SIC code describing your activity. Approval is usually within 24 hours for online applications.
- Check the business name isn't trademarked at gov.uk/search-for-trademark
- Sole trader registration: free, around 10 working days for the UTR letter
- Limited company formation: £50 online, usually approved within 24 hours
- Choose your accounting reference date carefully — it dictates your year-end
- Your registered office is public — many founders use their accountant's address
- Identify People with Significant Control (PSC) — anyone owning more than 25% of shares
Section 06
Contracts, terms & insurance
Written terms protect you. Even the most informal businesses should have clear payment terms, IP ownership clauses, and a complaints process. Most UK businesses need at least public liability insurance (£1m–£5m of cover for most contexts); if you give advice for a living, add professional indemnity. The moment you hire your first employee, employer's liability insurance is a legal requirement and uninsured trading carries fines of up to £2,500 per day.
- Public liability: injury or damage to third parties on your premises or caused by your work
- Professional indemnity: claims of bad advice — essential for consultants and designers
- Employer's liability: legally required from day one of employing anyone
- Product liability: critical if you sell physical goods to consumers
- Cyber insurance: increasingly worth it if you hold customer data
Section 07
Licences, permits and regulated activities
Some activities are regulated and need a specific licence — selling alcohol, providing financial advice, taxi driving, childcare, tattooing, street trading, and many more. GOV.UK's Licence Finder tool lets you enter your activity and postcode and tells you exactly which local council and national licences apply. Trading without the correct licence often invalidates your insurance, so check before you launch — not after your first complaint.
Section 08
Data protection & GDPR
If you handle personal data — and you almost certainly do, even if it's just a customer email list — you must comply with UK GDPR. In most cases that means registering with the ICO and paying the annual data protection fee (£40–£60 for most small businesses), publishing a written privacy policy on your website, and being able to respond to subject access requests within one calendar month.
At a glance
Sole trader vs Ltd vs LLP
| Sole trader | Limited company | LLP | |
|---|---|---|---|
| Set-up cost | Free | £50 online | £71 online |
| Personal liability | Unlimited | Limited to share capital | Limited (with exceptions) |
| Main tax | Income Tax + NI on profits | Corporation Tax + tax on dividends | Members pay Income Tax on share of profits |
| Annual filings | Self Assessment | Accounts + Confirmation Statement + CT600 | Accounts + Confirmation Statement |
| Public records | None | Directors, shareholders, accounts | Members, accounts |
| Investor-friendly | No | Yes — SEIS/EIS eligible | Limited |
| Best for | Freelancers, side-hustles, low-risk trades | Growing businesses, B2B services, anything raising investment | Professional services partnerships |
Common questions
Things people ask us
- Can I start as a sole trader and switch to a Ltd later?
- Yes — and many people do. Once profits regularly exceed about £30,000 the tax savings of a Ltd usually outweigh the extra admin. You incorporate a new company, transfer the trade across, and tell HMRC the sole trader business has ceased. An accountant should handle the changeover so you don't double-pay tax.
- Do I need an accountant?
- Sole traders with simple affairs can usually file their own Self Assessment. Limited companies are different — Corporation Tax returns, statutory accounts, payroll and dividend planning realistically need a qualified accountant, typically £80–£200 per month for a small Ltd. The tax savings they unlock almost always exceed the fee.
- Can a limited company name be the same as my domain?
- There's no requirement that they match. But you can only register a company name that isn't already taken on Companies House and isn't a registered trademark for the same goods or services. Check both before settling on a name, and ideally check social media handles too.
- What's a SIC code and how do I choose one?
- A Standard Industrial Classification code describes what your business does. You pick one (or several) when forming a Ltd. Use the GOV.UK SIC list — pick the closest match; it isn't legally binding on what you actually do, but it's used for statistics and credit checks.
- If I'm a sole trader, can I trade under a different name?
- Yes. You can use any 'business name' provided you don't suggest you're a limited company (no Ltd, Plc, etc.), don't use restricted words like 'royal' or 'British' without permission, and disclose your real legal name on invoices, contracts and your website.
Checklist
Before you move on
- Decided on sole trader, partnership or limited company
- Checked the business name on Companies House and the trademark register
- Registered with HMRC and/or Companies House and received your reference numbers
- Checked the GOV.UK Licence Finder for any permits your activity requires
- Registered with the ICO for data protection (or confirmed you're exempt)
- Drafted standard terms of business or client contracts
- Arranged the right insurance for your activity
Continue the guide
Next: Tax & HMRC