Types of business

Not all companies operate in the same way and each type of business has its own advantages and drawbacks. You'll need to conduct your own research to discover which is best suited to your business idea and the sector that it will operate in.

There are three main types of business that those seeking self-employment can look to establish: sole trader, partnership and limited company - but be warned, your selection will have tax implications and will affect your legal responsibilities.

Each type of company differs in terms of the paperwork you must complete, the tax you must pay, the way in which profit is distributed, and your personal responsibilities if the business makes a loss.

Sole trader

What is a sole trader?

A sole trader is the simplest and most common form of business structure, where one person owns and runs the entire business.

How do I register as a sole trader?

Registering as a sole trader in the UK is straightforward. You don’t need to form a company, but you do need to let HMRC (HM Revenue & Customs) know that you’re self-employed so they can tax you correctly. You’ll need to:

• decide to be a sole trader
• register with HMRC for Self Assessment
• keep proper business records
• file annual tax returns and pay tax.

What are the pros of being a sole trader?

• Simple to start - Minimal paperwork and legal requirements.
• Full profit retention - All the profits go directly to you.
• Total control - You make all the decisions.
• Privacy - Financial information is usually private.

What are the cons of being a sole trader?

• Unlimited personal liability - If your business owes money, you owe money.
• Harder to raise funds - Investors and banks may prefer companies with more formal structures.
• You do everything - You're responsible for all business tasks, or you have to outsource.
• Lack of continuity - If you stop working, the business may end.

Should I be a sole trader or a limited company?

Choose to be a sole trader if you:

• are starting small (e.g. freelancing, side hustle, solo service)
• want to start quickly and keep admin low
• aren't taking big financial risks
• want full control and to keep all the profits
• don't expect to earn significantly more than the personal allowance (£12,570) initially.

A limited company might be best if you:

• want to limit personal liability (important if you're taking on debt or legal risk)
• plan to earn higher profits and want to reduce your tax bill through dividends
• want to look more professional or credible (some clients prefer working with companies)
• may need to raise funding, take on partners, or sell the business later
• are thinking long-term and want to build a scalable business.

Partnership

What is a partnership?

A partnership is a type of business structure in which two or more people share the ownership, responsibilities, and profits of a business. It's a common choice when two or more individuals want to start a business together without forming a limited company.

How do I set up a partnership?

You need to:

• choose a business name (this is optional but helpful)
• register the partnership with HMRC and one partner will be nominated to handle tax returns
• ensure each partner registers for Self Assessment and files annual tax returns
• create a partnership agreement that outlines how profits, responsibilities, disputes, and exits will be handled. This isn't a necessity but is highly recommended.

What are the benefits of a partnership?

• easy and low cost to set up
• more resources (skills, time, money) than a sole trader
• shared responsibility and decision making
• flexible business structure.

What are the disadvantages of a partnership?

• each partner can be held responsible for all the partnership's debts
• disagreements can arise over money, roles, or direction
• one partner's actions can legally bind the others
• harder to raise investment compared to a company.

Private limited company

What is a limited company?

A private limited company (abbreviated as Ltd) is a type of business structure in the UK where the business is legally separate from its owners. It's one of the most popular ways to run a company because it combines limited liability with the ability to keep ownership private (not publicly traded).

How do I set up a limited company?

• choose a unique company name ending in 'Ltd' or 'Limited'
• register with Companies House, where you'll need to provide a registered office address (can be your home), details of at least one director and one shareholder, share structure (how ownership is divided) and articles of Association (basic rules for running the company)
• register for Corporation Tax with HMRC within three months
• open a business bank account.

What are the benefits of a limited company?

• Limited liability - shareholders' personal finances are protected.
• Tax efficiency - possible to take an income via a salary and dividends, which can reduce tax.
• Professional image - can help win clients, contracts, or funding.
• Ownership flexibility - easy to add co-founders, investors, or family.
• Perpetual existence - continues to exist even if directors or shareholders change.

What are the negatives of a limited company?

• More admin - must file annual accounts, confirmation statements, and maintain company records.
• Less privacy - company and financial information is publicly available at Companies House.
• Strict rules - must follow corporate laws and reporting requirements.
• Separate finances - personal and business money must be kept separate.

How do I know if a limited company is right for me?

You should consider a private limited company if you:

• want to protect your personal assets
• expect to earn over £30,000 in profit (can be more tax-efficient)
• want to grow the business, take on investors, or build a team
• are okay with extra paperwork and reporting.

Public limited company

What is a public limited company?

A public limited company (PLC) in the UK is a type of company that can offer shares to the public - including listing on a stock exchange like the London Stock Exchange (LSE). It's a more complex and highly regulated structure than a private limited company, usually chosen by larger businesses aiming to raise significant capital from investors.

Who owns a public limited company?

A public limited company is owned by its shareholders, the individuals or institutions that buy and hold shares in the company.

Unlike a private limited company, a PLC can sell shares to the public, which means anyone can become a part-owner by buying shares.

Other business structures

There are several other types of business, some of which must still be registered as one of the three business structures outlined above.

• Franchise - This is an already established company, such as McDonald's, KFC and Hertz, which is owned by a franchisor but managed by a franchisee. The franchisor sells the right to use their business model to the franchisee, who pays an ongoing fee. Workload and start-up costs are usually lower, business finance is more easily acquired, and relationships with suppliers, distributors and marketers already exist. However, large ongoing fees restrict franchisees' long-term profits, cheaper operating methods cannot be used unless sanctioned by the franchisor, and any negative action by a fellow franchisee may damage the business.
• Freelancer/consultant - These individuals have the skills, knowledge and experience in a particular field to charge organisations for their services. The most common jobs for freelancing or consultancy include performing arts roles such as actor, dancer and musician. Media jobs, such as broadcast journalist, magazine journalist, writer and photographer. Other popular freelancing roles include acupuncturist, barrister, fine artist, osteopath, graphic designer, translator, interior designer, textile designer and web designer.
• Social enterprise - This type of business is operated to benefit society or the environment and must transparently reinvest profits to achieve its objectives. There are around 100,000 social enterprises in the UK, employing almost two million people and contributing £60billion towards the UK economy. There are several types of social enterprise, most notably cooperatives, credit unions, development trusts, employee-owned businesses, and housing associations. Two well-known social enterprises are The Big Issue Foundation and the Eden Project.
• Charity - While the trading arm of a charity can be classified as a social enterprise, the charity itself cannot. This is because it differs in the sense that income is attained through grants and donations, rather than trade. Charities pay reduced business rates and receive tax breaks, and are normally run by trustees who don't themselves benefit from the charity. Learn more about the charity and voluntary work sector.

Find out more

• Discover if self-employment is right for you.
• For information and advice on getting started, see how to start a business.