Before choosing a company name or logo, there’s one crucial decision aspiring business owners need to make: deciding on the right type of business structure. This choice can shape how the company pays tax, how much personal liability the owners hold, how they can raise funding, and their reporting requirements.
In this blog, the UK’s leading company formation agent, Quality Company Formations, will guide you through the main types of business structures in the UK. You’ll learn their key differences and features to help you decide which is best.
What is a business structure?
Also known as a company or legal structure, or legal entity type, a business structure is the legal form under which an organisation operates. It defines the directors’ responsibilities, the company’s tax obligations, and the owners’ financial liability.
When forming a business in the UK, there are several structures to choose from, the main ones being:
- Sole trader
- Private company limited by shares (LTD)
- Private company limited by guarantee
- Limited liability partnership (LLP)
- Public limited company (PLC)
Let’s explore each of these options in more detail.
Sole trader
A sole trader business structure means you are self-employed. It is one of the simplest and most popular structures among freelancers and small business owners. The main point is that there is no legal distinction between you and the business.
Key features
- Easy to set up with minimal paperwork
- Full decision-making control
- Keep all your profits after tax
- You’re personally liable for all business debts
- No registration process involved
- You need to file an annual Self Assessment tax return to HMRC
If you plan to work alone or run a part-time business, the sole trader structure could be right for you. However, remember that your personal assets (like your home and savings) are at risk if the business incurs debts. Also, your business could be seen as less trustworthy than an incorporated one.
Private company limited by shares
An LTD is the most common incorporated business structure in the UK. It offers limited liability protection, separating personal assets from business liabilities.
Key features
- Shareholders (owners) are only liable up to the nominal value of their shares
- Suitable for one or multiple owners
- Governed by articles of association and the Companies Act 2006
- Profits are subject to Corporation Tax
- Subject to legal reporting requirements, such as accounts and annual filings with Companies House
- Incorporation fee and application involved
- As a separate legal entity, LTDs are suitable for succession planning
- Often seen as more credible and trustworthy than unincorporated entities
- Immediate legal protection for your company name
An LTD is an excellent choice if you plan to scale or want a more professional brand image. It appeals to customers, investors, and suppliers and offers several tax planning opportunities.
Private company limited by guarantee
A private company limited by guarantee is similar to an LTD but has guarantors instead of shareholders. This distinct business structure suits non-profit ventures, like charities and community clubs.
Key features
- Profits are usually reinvested rather than distributed
- Limited liability protection for guarantors
- Not suitable for for-profit businesses
- Incorporated entity with Companies House
- Subject to Corporation Tax, though charitable activities may be exempt
A private company limited by guarantee could be best if you want to set up a community-driven organisation. This doesn’t include charities. If you’re looking to set up a charity, you can choose this structure, but you’ll also need to register with the Charity Commission separately.
Limited liability partnership (LLP)
An LLP combines the elements of a traditional partnership and a private limited company. It’s a popular choice for organisations with multiple owners (or partners), particularly solicitors, accountants, consultants, and other professional services.
Key features
- Separate legal identity from its partners
- Does not issue shares and doesn’t have shareholders
- Subject to an LLP agreement rather than articles of association
- Requires at least two designated partners
- Partners have limited liability, protecting their personal assets
- LLPs are taxed as a partnership, not as a company, so members pay Income Tax on their share of profits
- Subject to Companies House filing requirements, such as annual accounts and a confirmation statement
An LLP is ideal if two or more people want to start a business with the security of limited liability and flexibility of a partnership. It’s especially suitable for professional firms and family-run businesses.
Public limited company (PLC)
A PLC has all the features of an LTD, plus the ability to raise capital by selling shares to the public via a stock exchange. A PLC business structure is best for large-scale organisations with ambitious growth plans and those seeking external investment.
Key features
- Can list shares on a stock exchange
- Limited liability protection for owners
- Requires at least two directors and a company secretary at all times
- Must have a minimum allotted share capital of £50,000, a quarter of which must be paid up
- Cannot start trading before receiving a trading certificate
- Subject to stricter reporting, governance, and transparency rules than other business structures
- Must file annual accounts and maintain a public register of shareholders
If you’re unsure about your long-term commercial plans, you can choose an LTD business structure to start with and convert to a PLC once your company grows and meets the relevant legal requirements.
Ready to set up?
With so many different business structures, it can be difficult to understand their features and differences. Choosing the right one for you can also be confusing.
We hope this guide clarifies some of the most popular business structures in the UK and helps you make an informed decision.
If you’re ready to set up a UK company, visit the Quality Company Formations website and start by entering your ideal company name. Browse their selection of company formation packages based on your chosen business structure, and their experts will do the rest. Regardless of your chosen structure, you’ll find all the compliance and business support you need with QCF.
