Choosing the right business structure: Ltd, sole trader, partnership or LLP

Sole Trader: Simple but risky

Starting as a sole trader is straightforward and one of the most common options for solo entrepreneurs. You retain full control, have minimal administrative obligations and profits are taxed as personal income. Freelancers, photographers, graphic designers, architects, hairdressers, and small construction businesses often begin this way.

Advantages:

• Simple setup and administration
• Full control of business decisions
• All profits belong to the owner
• Can be more tax efficient if you need every penny from the business profits to live on

Drawbacks:

• No legal separation between you and your business
• Personal assets are at risk if the business incurs debt or legal claims are made
• Profits are taxed as personal income, can be less tax-efficient as profits rise

Our thoughts:

Sole trading is ideal for testing a business idea or operating a small-scale venture, as long as you understand the personal financial risks involved. It offers simplicity and control, but it is crucial to plan for growth. Once profits increase, you could quickly incur higher income tax rates, even if much of the cash is reinvested in the business.

Personal asset protection is a key consideration. Without legal separation, your home, savings, or other assets could be at risk if the business faces financial trouble. Insurance, pension planning, and contingency funds are practical ways to mitigate this risk.

Think ahead to growth. If you plan to hire staff, attract investors or scale operations, transitioning to a limited company or LLP can offer better liability protection and tax efficiency. Sole trading is an excellent first step, but it should be part of a broader, flexible business plan.

Partnership: Shared responsibility, shared risks

A partnership is essentially a sole trade structure with multiple owners. It’s popular among friends, family members, or business associates who want to combine skills and share responsibilities.

Advantages:

• Shared workload and decision-making
• Simple structure with minimal setup costs
• Profits distributed among partners
• Can be more tax efficient if you need every penny from the business profits to live on
• Flexible in terms of allocation of profits year to year

Drawbacks:

• Each partner is personally liable for business debts, personal assets are at risk if the business incurs debt or legal claims are made
• Profits are taxed as personal income, can be less tax-efficient as profits rise
• Disagreements between partners can create operational challenges

Our thoughts:

Partnerships can be a great way to combine skills and share the workload, particularly when you’re starting a business with someone you trust. The structure is simple to set up and allows profits and responsibilities to be shared, but it does come with shared liability and each partner is personally responsible for any debts the business incurs.

It is important to have a clear partnership agreement in place, especially if the partners of the business are family or friends. This should identify how profits are divided, what responsibilities each partner has, how important decisions should be agreed and what happens if one partner wants to leave. Without this, disagreements can quickly disrupt the business.

While partnerships work well in the early stages, businesses planning for growth, external investment, or succession may result in LLPs or limited companies being a less risky and more tax-efficient option. A partnership is excellent for collaboration but comes with trade-offs in personal risk and long-term flexibility.

Limited Company: Legal protection, but higher taxes

A limited company provides legal separation between you and your business. It limits personal liability, adds credibility with clients, and can make growth and investment easier.

Advantages:

• Limited liability protects personal assets
• Credibility with clients, partners, and investors
• Easier to attract investment or sell the business
• Clear legal structure for how co-owners and directors work together

Drawbacks:

• Corporation tax and dividend taxes can be less efficient for smaller profits
• Administrative responsibilities and costs are higher, including filing accounts with Companies House
• National Insurance costs have increased, affecting take-home profits
• Very regimented in how income can be taken

Our thoughts:

A limited company offers protection and credibility that’s hard to match with other structures. It’s particularly suited for businesses that plan to retain profits, invest in growth, or eventually sell.

Tax planning is crucial. Profits are subject to corporation tax and any salary or dividends you take are taxed separately, so a strategic combination of salary and dividends can help minimise overall tax and National Insurance liabilities.

While administration is more complex as statutory accounts, company tax returns, and payroll compliance are required, the long-term benefits often outweigh the additional effort.

For businesses anticipating significant growth or looking for external funding, a limited company provides a framework for professional management, enhanced credibility and legal protection. Director responsibilities are real, but manageable with the right advice, making this structure the natural step as businesses move beyond the start-up phase.

LLP: Flexibility meets limited liability

A Limited Liability Partnership (LLP) combines the protection of a limited company with the tax advantages of a partnership. Partners enjoy limited liability while being taxed under the self-employed regime.

Advantages:

• Limited liability protects personal assets
• Taxed like a partnership, often more efficient than limited companies for many businesses
• No benefit-in-kind on company cars for partners
• Reduces employer National Insurance costs when senior staff are made partners
• Flexible profit sharing and easy to bring in new partners
• Supports succession planning and long-term business continuity

Drawbacks:

• Must file annual accounts at Companies House
• Administrative costs similar to a limited company
• Profits taxed at personal rates, which can be higher at very high profit levels

Our thoughts:

LLPs offer a unique combination of protection, flexibility, and tax efficiency. They’re particularly effective for professional services or businesses that want to bring senior staff into ownership, reduce employer National Insurance, or create succession pathways.

Even single owner businesses may benefit from transitioning to an LLP as they grow. The structure allows adaptable profit sharing and flexible roles for partners, making it a strong option for businesses planning for long-term growth, staff involvement, and succession.

Next steps

At A4G, we help business owners assess whether their current structure still fits their goals. Whether you’re considering moving from a limited company to an LLP, weighing the benefits of sole trader or partnership status, or planning for growth, we can guide you through the pros, cons, and tax implications.

Book a free 1-2-1 consultation with one of our experts today. Email enquiries@a4g-llp.co.uk or call 01474 853 856.