Choosing the right legal entity is a critical decision for a business owner. The legal structure you choose will impact your business’s liability, taxation, ownership, and overall operations. To help you navigate this process, we have created this guide that outlines the three main legal entities available in the UK and provides information to assist you in making an informed choice. There are other business structures available, but they have very specific uses and are far more uncommon. 

Sole Trader 

A sole trader is the simplest and most common legal structure for small businesses in the UK. As a sole trader, you are the sole owner of the business and personally responsible for its debts and liabilities. This structure offers flexibility, minimal setup costs, and easy decision-making. However, it does not provide any separation between personal and business assets, and you are personally liable for any losses or legal issues. 

Decision Tree: 

  • If you have a business partner or partners, continue to Partnership. If it’s just you continue to the next question. 
  • Are you comfortable with unlimited personal liability for business debts? If yes, continue to the next question. If not, consider other legal entities. 
  • Are you comfortable with unlimited personal liability for legal obligations? If yes, becoming a sole trader may be suitable for you. If not, consider other legal entities. 
  • Are you willing to pay income tax on the whole net profit of your business? If yes, becoming a sole trader may be suitable for you. If not, consider other legal entities. 

Partnership 

A partnership involves two or more individuals sharing the ownership, profits, and responsibilities of a business. There are two main types of partnerships in the UK: general partnerships and limited partnerships. In a general partnership, all partners have equal responsibility and liability. In a limited partnership, there is at least one general partner with unlimited liability and one or more limited partners with limited liability. 

Decision Tree: 

  • Are you comfortable with shared liability for all business debts? If yes, forming a partnership may be suitable for your business. If not, consider other legal entities. 
  • Are you comfortable with shared liability for all legal obligations? If yes, forming a partnership may be suitable for your business. If not, consider other legal entities. 
  • Are you willing to pay income tax on the whole net profit of your business? If yes, becoming a Partnership may be suitable for you. If not, consider other legal entities. 

Limited Company 

A limited company is a separate legal entity from its owners, providing limited liability protection. There are two types of limited companies in the UK: private limited companies (Ltd) and public limited companies (PLC). Private limited companies are the most common for small businesses, offering limited liability for shareholders and more flexibility in operations. 

Decision Tree: 

  • Do you want to separate your personal assets from business liabilities and enjoy limited liability protection? If yes, proceed to the next question. If not, consider other legal entities. 
  • Do you plan to raise capital from external investors or list your company on the stock exchange in the future? If yes, proceed to the next question. If not, consider other legal entities. 

Do you wish to take advantage of the tax and National insurance efficiencies available to Limited Companies? If yes, forming a limited company, particularly a private limited company (Ltd), may be suitable for your business. If not, consider other legal entities. 

Limited Liability Partnership (LLP) 

An LLP combines elements of partnerships and limited companies, providing limited liability protection to its members. It is commonly used by professional services firms, such as law firms and accounting practices, where individual partners have limited liability for each other’s actions. 

Decision Tree: 

  • Do you want to enjoy limited liability protection while maintaining a flexible partnership structure? If yes, forming an LLP may be suitable for your business. If not, consider other legal entities. 

Decision Tree Summary 

  • Do you want full control over your business and are you comfortable with unlimited personal liability? If yes, become a sole trader. 
  • Do you want to share ownership and liability with partners? If yes, consider a partnership. 
  • Do you want limited liability protection, tax efficiencies, and plan to raise external capital or list your company? If yes, form a limited company. 
  • Do you want limited liability protection while maintaining a partnership structure? If yes, consider an LLP. 

Choosing the right legal entity is a crucial step in establishing your business. By considering the decision tree and evaluating your business’s specific needs, you can make an informed choice that aligns with your goals and provides the necessary legal protection. It is advisable to consult with a professional who can provide personalised advice based on your circumstances. Remember, the legal structure you choose can have significant implications for your business’s future, so take the time to make a well-informed decision. 

For more information on this or if you have any further questions about company structures and how to set them up or you would like us to do it for you