One of the first decisions when starting a business in England and Wales is what legal structure to use. The main options are the sole trader, the partnership (and its limited-liability cousin, the LLP), and the limited company. Each has different consequences for liability, tax, admin and credibility. Here is a plain-English comparison.
Sole trader
You run the business as an individual, self-employed.
Pros:
- Simple and cheap to set up, just register for Self Assessment with HMRC.
- Full control and minimal admin.
- Privacy, your accounts are not on a public register.
Cons:
- Unlimited personal liability, there is no legal separation between you and the business, so your personal assets are at risk for business debts.
- Profits taxed as income through Self Assessment (income tax + National Insurance), which can be less efficient at higher profits.
- Can look less established to some clients and lenders.
Best for: low-risk, smaller or early-stage businesses.
Partnership (general partnership)
Two or more people run a business together under the Partnership Act 1890.
Pros:
- Simple to set up; shared capital, skills and workload.
- Flexible, a partnership agreement can set out profit shares and roles.
Cons:
- Unlimited liability, and partners are usually jointly liable for the firm's debts, you can be liable for a partner's business actions.
- Without a written partnership agreement, the default rules of the 1890 Act apply (e.g. profits shared equally; the partnership can be dissolved by one partner's notice or on a partner's death).
- Each partner taxed individually on their share via Self Assessment.
Best for: professionals and small ventures with trusted co-owners (with a proper agreement).
Limited Liability Partnership (LLP), a middle option
An LLP (Limited Liability Partnerships Act 2000) gives partners limited liability and separate legal personality, while keeping partnership-style flexibility and tax (members taxed individually). It must register at Companies House and file accounts publicly. Popular with professional firms.
Limited company
A private limited company is a separate legal person, owned by shareholders and run by directors, under the Companies Act 2006.
Pros:
- Limited liability, shareholders' risk is generally limited to what they invest (subject to any personal guarantees).
- Often tax-efficient, profits subject to corporation tax, and owners can plan how to draw income (salary/dividends).
- Credibility and easier to raise investment (it can issue shares); ownership is transferable.
Cons:
- More admin and cost, registration, annual accounts and confirmation statement at Companies House, and public disclosure of directors and accounts.
- Directors' duties (Companies Act 2006, ss 171–177) and statutory compliance.
- Less privacy; getting money out has tax rules to follow.
Best for: businesses wanting liability protection, growth or investment, or where tax planning helps.
Quick comparison
| Sole trader | Partnership | LLP | Limited company | |
|---|---|---|---|---|
| Separate legal entity | No | No | Yes | Yes |
| Personal liability | Unlimited | Unlimited (joint) | Limited | Limited |
| Main tax | Income tax (SA) | Income tax (SA) | Income tax (SA) | Corporation tax |
| Public filing | No | No | Yes | Yes |
| Set-up/admin | Lowest | Low | Medium | Higher |
How to choose
Weigh up: how much risk the business carries (favouring limited liability), expected profits (affecting tax), the need to raise investment, and how much admin and disclosure you can manage. Many businesses start as a sole trader and incorporate as they grow. Take accountancy and legal advice before deciding, as the best structure depends on your circumstances.
Key takeaways
- Sole trader/partnership: simple and private, but unlimited personal liability and income-tax treatment.
- LLP: partnership flexibility plus limited liability, but public filing at Companies House.
- Limited company: limited liability, often tax-efficient, better for raising investment, at the cost of more admin, disclosure and director duties.
- Choose based on risk, profit, investment needs and admin appetite, and take professional advice.
Sources
- Partnership Act 1890 (general partnerships); Limited Liability Partnerships Act 2000 (LLPs)
- Companies Act 2006 (limited companies; directors' duties; filing requirements)
- HMRC rules on Self Assessment, National Insurance, corporation tax and dividends
--- This article is general information about the law of England & Wales as at 2026, not legal or tax advice. For advice on your circumstances, consult a qualified solicitor or accountant.