Starting or reshaping a business forces an early decision: choosing the right business structure. It affects tax, legal risk, funding, payroll, and how your figures appear on public record. Get it right and you set up clean admin, clearer cashflow, and fewer surprises at year end. Leave it to chance and you risk higher tax, missed reliefs, and complications if you want to hire, borrow, or sell later.
In this guide, we explain the benefits and risks of each option, highlight typical scenarios, and signpost where reforms could change your filing duties. If you want tailored advice, you can speak to us via our contact page and we’ll map the structure to your plans and numbers.
Sole trader: Simple, flexible, and fast to start
For many start-ups and freelancers, choosing the right business structure begins with the sole trader route. It is straightforward to set up and easy to run.
Key points:
- Tax and NICs: Profits are taxed through self assessment. For 2025/26, the personal allowance is £12,570, with 20%, 40% and 45% income tax bands above that, and Class 4 NIC at 6% then 2% on higher profits.
- Liability: You are personally responsible for business debts. There is no legal separation between you and the business.
- Admin: Light compliance, no Companies House filing, no public accounts.
- VAT: You must register once rolling annual taxable turnover exceeds £90,000, the current threshold since April 2024.
When it fits: Early-stage consulting, creative services, trades and side businesses testing demand. You keep admin lean while you validate pricing and cashflow.
What to watch out for: Personal liability, fewer options to bring in investors, and limited tax planning once profits rise significantly. If profits head north of the higher-rate band, incorporation can be worth a fresh look.
Partnership and LLP: Shared ownership with clear roles
A traditional partnership suits two or more people trading together. An LLP blends partnership flexibility with separate legal personality.
Key points:
- Tax and NICs: Each partner is taxed on their share of profits through self assessment using the same 2025/26 income tax and Class 4 NIC rules as sole traders.
- Liability: General partnerships have joint and several liability for debts. LLP members usually benefit from limited liability if the LLP is run correctly.
- Admin: Partnerships file a partnership return; LLPs file accounts at Companies House.
When it fits: Professional services with multiple fee-earners, family businesses with clear profit sharing, or ventures where flexibility over drawings and roles is helpful.
What to watch out for: In a general partnership, partners remain exposed to each other’s decisions. In an LLP, expect added filing and governance. Either way, a solid partnership or LLP agreement is essential to cover capital, drawings, leavers, and disputes.
Limited company: Separate legal entity and broader tax options
Incorporation creates a separate legal entity. That separation brings protection and planning options, but also more reporting and director duties.
Key points:
- Tax: Corporation tax is 19% for profits up to £50,000 and 25% above £250,000, with marginal relief in between. Directors usually draw a mix of salary and dividends. The dividend allowance is £500 in 2025/26; dividend tax rates are 8.75%, 33.75% and 39.35% depending on your band.
- Liability: Limited liability protects personal assets if the company fails, provided directors meet their duties.
- Admin and transparency: Companies file annual accounts and a confirmation statement at Companies House. The public record helps with credibility but reduces privacy.
When it fits: Growth-minded businesses, those hiring staff, or owners planning to retain profits, raise investment, or sell. The company structure can also support pension contributions and other benefits in a controlled way.
What to watch out for: More complex compliance and director responsibilities. Profit extraction needs planning to balance salary, dividends, and pensions. Keep an eye on filing reforms that affect what becomes publicly visible.
What’s changing at Companies House?
Reform continues. The government’s programme under the Economic Crime and Corporate Transparency Act is phasing in changes to identity verification, data quality, and accounts filing.
Headline changes to expect:
- Abridged accounts: Will no longer be permitted. From 1 April 2027, small companies and micro-entities will have to file fuller accounts, including a profit and loss account; small companies must also file a directors’ report.
- Software filing: Accounts will move to software-only filing from 2027 for most companies, ending paper and most web submissions.
- Registers and verification: Wider register changes and data suppression measures are rolling out through 2025, with more identity checks to follow.
Practical takeaway: if you are choosing the right business structure with privacy in mind, recognise that company filings are set to be more transparent from 2027. We can advise on what will appear on record and the timing of any change.
Practical comparisons and examples
Here is how the structures typically play out in real life:
- Early-stage consultant: Sole trader: Minimal admin, straightforward Self Assessment. If profits grow towards higher-rate tax, we review incorporation to manage cashflow and pensions more efficiently.
- Husband and wife retail start-up: Partnership or LLP: Shared ownership and flexible profit splits. Prepare a partnership agreement, monitor VAT turnover against the £90,000 threshold, and review whether a company would improve supplier credibility.
- Tech services firm hiring staff: Limited company: Employer payroll, corporate brand, and share options later. We design a salary-dividend mix within the 2025/26 rates, plan for corporation tax payments, and prepare for Companies House changes on accounts.
If you are torn between options, we model after-tax income across scenarios and include VAT and payroll effects. That makes choosing the right business structure a numbers-led decision, not guesswork.
Decision checklist before you choose
- Risk appetite: Personal liability tolerance and sector risk.
- Profit profile: Expected profits now and in 12–24 months under 2025/26 rates.
- Funding and hiring: Need for investors, bank lending, or staff.
- Privacy and profile: Comfort with public filings and credit checks.
- Admin capacity: Time and budget for bookkeeping, payroll, and filings.
Quick actions:
- Business insurance: Regardless of structure, ring-fence risk with appropriate cover.
- Record-keeping: Good bookkeeping underpins all choices – it reduces tax friction and keeps cashflow predictable.
- VAT watch: Track rolling turnover against £90,000 to avoid late registration penalties.
Ready to move forward?
Choosing a structure is not a once-and-done decision. Tax rates, VAT thresholds and filing rules change, and growth plans evolve. For 2025/26, the steady income tax bands, Class 4 NIC at 6% and 2%, corporation tax tiering, and the £90,000 VAT threshold create clear decision points, but Companies House reforms mean incorporation will be more transparent from 2027. If you are choosing the right business structure, we recommend a short planning session to compare after-tax outcomes and risk across the next two years, not just now.
We help founders and owners weigh liability, tax efficiency, filings, and future funding in plain English. If you want tailored advice on choosing the right business structure, get in touch and we will map the decision to your numbers and goals. Start here: speak to our team.