Choosing the right legal structure is one of the most important decisions when starting a business. The structure you select impacts your tax obligations, liability, and how much control you retain.
Sole trader
A sole trader is the simplest and most common business structure, ideal for individuals who want full control over their operations.
As a sole trader, you are entitled to keep all profits after tax, but are also personally responsible for any debts the business incurs.
Partnership
A partnership involves two or more people sharing the responsibilities, profits, and liabilities of a business. Each partner pays tax on their share of the profits, and a written partnership agreement outlines the roles, ownership, and liability of each party.
While partnerships are relatively straightforward to set up and can combine resources, the shared liability means all partners are equally responsible for debts.
Limited liability partnership
A limited liability partnership offers the flexibility of a traditional partnership with the added benefit of limited liability. This means partners are only liable for debts up to the amount they have invested.
LLPs must register with Companies House and prepare annual accounts, which are accessible to the public. In some cases, LLP members may be required to provide a directors personal guarantee, which Parachute Law can help with.
Incorporating a limited company
Incorporating a limited company is a popular choice for businesses wanting to protect personal assets. Shareholders’ liability is limited to the amount they have invested. GOV.UK has a step-by-step guide on setting up a limited company.
Factors to consider when choosing
When selecting a legal structure, liability should be a top consideration. Limited liability structures like LLPs or limited companies provide greater protection compared to sole traders or partnerships.
Tax implications are also vital, as each structure has different tax obligations. Sole traders, for instance, pay income tax, while limited companies are subject to corporation tax.
Choosing the right legal structure affects your business’s liability, tax, and operations. Assess your options carefully and seek professional advice.