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The best legal structure for your business

structure of business

What business structure should you choose for your business? 


Should you trade as a sole trader, a Limited company, or perhaps, a Partnership? Read the blog to find out what would be the most beneficial for your business.


Choosing the legal structure of your business is one of the most important decisions you will have to make. Let’s weigh up some pros and cons:
 Responsibilities and liabilities
As a sole trader, you and your business are one, this means you will take full liability for any money owed by your business.

To become a sole trader, you must register with HMRC and pay income tax and National Insurance contributions on all profits. You need to register as self-employed if you’ve earned more than £1,000. 

You can register online on the link below:

A limited company is a legal entity by itself and separate from the owner, which means the owner or director will have limited liability. Their personal finances are separate from the business and therefore won’t be affected, should the business experience financial struggles. Limited Liability Company has to register with Companies House and pay corporation tax.

Limited Liability Company has to register with Companies House and pay corporation tax.
You can find guidance on how to set up a limited company: 
www.gov.uk/set-up-limited-company

From a tax point of view, it's beneficial to register as a Limited company, if you are earning more than £50,000.

What does limited liability mean?
As mentioned above, as a sole trader, there is no distinction between the business and the owner, so if the business runs into difficulties, you may lose the personal assets you own. As a Director of a limited company, you are a separate legal entity from your company and therefore your personal assets are protected and it’s the company, that will go into liquidation.

What does it mean financially?
Being a sole trader brings an increased level of risk, however, it also brings advantages. What money after tax you make is yours, because you and your business are one, and therefore it is your profit. HMRC is gradually bringing making tax digital and it will be compulsory from April 2024.  

As an owner of a limited company, you will draw your earnings from a salary, which is taxed at standard PAYE rates, bonuses, and dividends, there is a tax-free allowance of £2000 for dividends. The company has to have a separate bank account and the owner of the company cannot spend or take unlimited amounts of money out of the company’s account same as the sole trader because the company is a separate legal entity and therefore the money belongs to the company.

Taxation is another aspect, you should consider. While being a sole trader is quite simple, it may be more tax-efficient for the higher income bracket to register as a limited company, pay yourself a salary, and claim dividends.

What’s best?
You may also want to think about where do you want to get in the future. Do you want a small business and simple life, that fits around your family, or do you want to ‘take over the world’? 
In essence, choosing to run your business as a sole trader or a limited company isn’t about what’s better or what’s worse, it’s about what you want to achieve with your business and your personal preferences.

3 things to know about sole trader
  • The tax year runs from 6 April to 5 April 
  • You need to register as self-employed, if you’ve earned more than £1,000 from self-employed between 6 April 2020 and 5 April 2021
  • You can register online on the link below

There is step-by-step guidance on how to set up a limited company on the HMRC website, just follow the link below.

Whatever your structure, you should always treat your business as your best customer and work on it regularly.
You should ask yourself, "Do I want to own a job, or do I want to own a business".

I hope this was helpful and have a better idea of the best business structure to choose for your business. If you need help, check out what we can help you with.

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