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How to choose the right business structure

Sole trader, partnership or limited company? Your guide to choosing the best structure for your business.

In this article

Sole trader

Being a sole trader means being in business on your own. It’s a relatively straightforward structure, where you are self-employed and, legally, you and your business are considered as one. It’s the most common structure used by self-employed individuals and small businesses.

The advantages are:

  • it’s quick and easy to set up
  • you can start trading immediately, subject to any insurance or licences you need
  • you can still employ staff
  • you retain complete control of your business
  • your accounting can be more straightforward – HMRC calculates your tax after you submit an annual tax return.

The disadvantages are:

  • you are personally responsible for your company’s debts - in the worst-case scenario, you could be made bankrupt and your personal assets sold to pay your creditors
  • you may be missing out on tax advantages – you can’t defer profits to future years, for example.

If you decide to set up as a sole trader, ensure you notify HMRC within three months of beginning trading. You also need business insurance to cover your venture – see our guide to insurance for traders and local businesses for more details.


Partnerships can operate in a similar straightforward way to a sole-trader structure – only there is more than one owner involved. Each owner is jointly responsible for the debts of the business. If one or more partners leave the business, then the remaining partner(s) are responsible for all debts.

An alternative partnership structure, which provides more protection against personal bankruptcy, is a limited liability partnership (LLP). This is a more complex business structure and must be registered with Companies House, where all basic business information must be on public record – much like a limited company.

Some businesses start out as a simple partnership, but then choose to change status to a limited company or a limited liability partnership.

Whether you plan to run your business as a simple or limited liability partnership, you should ensure you have a partnership agreement in place to create the correct legal framework for the business. You can use an off-the-shelf template, which you can find online, but it’s probably a good idea to take legal advice. See our article on how to find a lawyer for more information. It’s important that all partners share the same goals for the business and will work together to achieve them.

The advantages of a partnership are:

  • you share the responsibility
  • you share the risk
  • you have access to the skillset of each partner.

The disadvantages of a partnership are:

  • you will lose some measure of control over your business structure
  • if partners’ business goals are not compatible, it can lead to a difficult working environment

Limited company

A limited company is legally separate from the individuals who set it up, so it is responsible for its own debts. If things go wrong, it’s the company that goes bust, not you – as long as you can establish that you have run the operation legally and in good faith.

Limited companies can also add to your credibility if you’re dealing with other businesses. On the downside, you are required to submit annual accounts to Companies House, and there is an increased level of administration and government regulation to deal with.

The advantages of limited-company status are:

  • the separation of your personal and business finances – you won’t go bust if your business goes under
  • increased credibility with other businesses – limited-company businesses can be seen as more substantial than sole traders, partly because of the complexity involved in setting up and running them
  • the ability to keep profits within the business. This can reduce your tax bill, as corporation tax on profits is generally lower than income tax for individuals or partners
  • you can reduce your tax bill by paying small salaries and high dividends, which aren’t liable for National Insurance contributions
  • it can be easier from a legal or a tax perspective to sell an incorporated business when you retire or die than it is to sell a sole trading or partnership structure
  • you can raise money from outside shareholders via the Enterprise Investment Scheme, which gives tax breaks to investors in small unquoted companies.

Disadvantages of limited-company status are:

  • you will have to register the business and pay annual fees to Companies House
  • increased administration and governmental regulation
  • your business’s accounts may be more complicated and costly to produce, requiring auditing, even if your turnover is low
  • you have to make National Insurance payments both as an employer and as an employee if you draw a salary above £153 a week.

Review your business structure

Remember to keep your business structure under review as it develops. It’s relatively straightforward to switch from sole-trader status to a partnership or a limited company. However, you may wish to consultant an accountant before taking this step. If you don’t already have one, see our article on finding an accountant for tips on finding one that suits your business.

If you do change your business structure, you will need to amend all paperwork to reflect the changes, and also your website, in line with The Companies (Trading Disclosures) Regulations 2008 and e-Commerce Regulations.

Any Which? Trusted trader changing its business structure will need to sign a new agreement with us, as a new legal entity. Which? Trusted Traders would also need to see its accounts after six months of trading activity. 

It’s also a good idea to clearly state the name you were formerly trading under on your Which? Trusted trader profile page, so consumers can see any change of legal entity. 

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