Types of Business Structures in the UK Explained

If you’re a business enthusiast looking to start your own venture, there are plenty of factors to consider before turning your dream into reality.

One of the most important ones is business structure.

There are several different types of business structures in the UK. Each business model comes with its own legal distinction, tax implications, and other peculiarities.

In the following sections, we explore the different types of business structures in the UK and offer tips on selecting the right one for you as a business owner.

Overview of UK Business Structures

Before we jump into the different legal structures and business models, it’s important to understand how the UK’s business sector is shaped.

According to research, 56% of the UK’s private sector was made up of sole proprietorships in 2023. At the same time, there were 37% actively trading companies and 7% ordinary partnerships.

This makes the most popular business structures sole proprietorships, partnerships, and limited companies.

However, there are a range of other business legal structure forms that you can choose from, depending on whether you plan to run small businesses or large corporations.

Here’s everything you need to know about the UK business structures.

Sole Trader: Simplicity and Full Control

As mentioned above, the sole trader structure is among the most popular in the UK.

Sole traders are, in essence, business owners who are not considered a separate legal entity from their company. They are in full control of their own business.

One of the reasons why sole proprietorships are one of the most commonly seen business structures in the UK is that they’re the easiest way to own a business. 

All sole traders in the UK are self-employed but can also hire staff. They are personally liable for the business’s debts and losses (with unlimited liability) and are obliged to file a self-assessment tax return every year with the HMRC.

The biggest advantage of starting a sole proprietorship is that owners don’t have to discuss business decisions with partners and are completely in control of all processes and decision-making. 

However, a drawback is the personal liability associated with this structure as the owner is not a legally separate entity from the business. Being personally responsible for all debts and losses of the company may put a heavy weight on the shoulders of business owners. 

In addition, it can be a difficult journey to acquire capital as in most cases, sole proprietorships are considered highly risky due to the level of personal risk.

At the same time, this business structure is ideal for those interested in launching a startup business without significant startup costs. 

To register, you’ll need to contact the HMRC. You’ll be asked to provide personal information and complete a registration process. You’ll be provided with a Unique Taxpayer Reference that you can use to pay income tax.

Make sure you have up-to-date financial records and note that you will be obliged to pay tax on your income by filing a self-assessment tax return. 

Partnerships: Shared Responsibilities

Another popular type of business structure in the UK is the business partnership. 

Under a partnership agreement, two or more partners share responsibility and profits generated as a result of running a business entity.  Just like with sole proprietorships, business owners of partnerships are personally responsible for any business liabilities. However, in this case, the responsibility is shared. 

The reason why a traditional partnership is preferred by many is that it enables companies to access resources and experience easily. This enables them to enter new markets, raise finance, and reach more clients. 

Meanwhile, running an ordinary partnership can also be a complicated journey. For example, one partner may have completely different opinions and interests from another. Another potential disadvantage is that just like with sole traders, partners have unlimited liability and must also share business profits. The difference here is that the partner pays tax separately and is responsible for submitting a separate tax return. 

In order to set up a business partnership, you’ll need to register with the HMRC and also file an annual self-assessment tax return, just like with sole proprietorships. But before you can register, it’s essential to select a company name that is available by checking on the Companies House website. 

Business partnerships must also have a “nominated partner” who will be responsible for filing the annual company tax return of the business.

You’ll also be required to complete a Partnership Return in order to demonstrate the profit and loss shares of each partner. 

Limited Companies: Limited Liability and Formal Structure

Limited companies are business structures where the shareholders are considered separate from the business entity, which has its own legal rights.

In order for a business to be considered a limited company, it must have at least one director, with no maximum limits on the number of directors that the business can have. A company limited by shares is obliged to consist of at least one shareholder, who can perform the same duties as a director simultaneously.

To create your limited company, you’ll need to register for both Companies House and corporation tax simultaneously. You can do so via the Gov.uk website by paying a small fee. You’ll also need to submit annual accounts and go through early auditing processes.

It’s important to note that limited companies are usually significantly more tax efficient when compared to paying income tax. 

Limited companies can be of two types – private and public.

Here’s how they differ.

Private Limited Companies

In a private limited company or Ltd, the business possesses shareholders but the shares cannot be offered for sale to the public. 

Private limited companies must consist of at least one director and one shareholder. This business type can be either “limited by guarantee” or “limited by shares”. 

Private limited companies are a popular business structure as they give the owner significant control, come with limited liability, and are easy to handle when it comes to raising finances.

On the other hand, they are associated with higher set-up costs when compared to other business structures. There are also company name restrictions that it’s key to familiarise yourself with, along with strict record-keeping requirements. 

To create your own private limited company, you’ll need to get in touch with Companies House to register. You’ll also be required to create a “memorandum of association” and “articles of association”. These documents outline the structure of your business and the processes you’ll be using to operate.  

The “memorandum of understanding” stores all basic data about the business, while the “articles of association” explain the rules and regulations that will be used to run your company.

When registering with Companies House, there’s a registration fee that needs to be paid. After registration, you’ll be responsible for filing annual reports and accounts.

Public Limited Companies (PLCs)

On the other hand, limited companies can also be public.

Unlike a private limited company, a public limited company is officially listed on the stock exchange where the general public can invest in the business by purchasing shares. 

The requirements for a public limited company are that it has at least two directors and at least  £50,000 in share capital. 

A lucrative characteristic of a public limited company is that it can quickly and easily raise capital by selling shares. These finances can be invested in the business to grow or cover any liabilities. In addition, this business structure also has limited liability, meaning that personal assets are protected.

At the same time, a public limited company must make all financial data available to the public. This eliminates all privacy from the equation and makes the company visible to all. 

To register a PLC, make sure that you have a minimum of two directors, two shareholders (and a qualified secretary, where necessary) and at least £50,000 in share capital.

Choose your business name, compile your documents (“memorandum of association” and “articles of association”) and file them to Companies House when submitting your application. 

Finally, apply for a trading certificate – a key component for all public limited companies that verifies that all share capital requirements are met. 

Limited Liability Partnerships (LLPs): Combining Flexibility with Protection

A limited liability partnership (LLP) is established based on some of the ground principles of a traditional partnership and a limited company. 

It consists of two or more owners, who have limited liability (limited to the amount each owner has invested in the company) for any business debts and obligations. Unlike with sole proprietorships or ordinary business partnerships, any personal finances and personal assets of the partners cannot be seized. 

Another key difference is that there are no written rules about how the partners must share profits and losses. They can agree on any framework that works best for them based on their level of involvement, experience, or other factors. 

All of these details are outlined in a must-have document called the “LLP Agreement”. 

This business structure is attractive as a result of its limited liability and potential tax advantages. However, a drawback is that finances are publicly disclosed, which may not be ideal for some business owners. 

In order to create your LLP, you’ll need to select a business name, ensuring that it ends with “Limited Liability Partnership” or “LLP”. Choose your registered office address, where you’ll receive important information from Companies House.

Next, register the business with Companies House either online or via post. Note that members are required to submit their personal self-assessment tax return early and pay National Insurance to HMRC.

Social Enterprises: Mission-Driven Structures

Just like the name suggests, social enterprises are business structures that run for the sake of benefiting society or the environment.

If you are interested in setting up a social enterprise, there are multiple types to choose from. They include credit unions, development trusts, employee-owned businesses, and housing associations. 

Unlike the standard business structures, social enterprises reinvest all profits into reaching their social objectives and contributing towards improving certain social or environmental problems. 

One of the advantages of social enterprises is that they have access to grants, donations, and social investment funding. These options are not available to most other business structures. They can also enjoy different tax breaks and benefits.

However, there are strict regulatory requirements, which may make running a social enterprise extremely challenging. In addition, the restriction on profit distribution can impose significant limitations on how attractive these organisations appear to investors. 

The registration of a social enterprise in the UK depends on the exact structure of the organisation. In most cases, you’ll need to present a defined social mission, be prepared to comply with all legal expectations and requirements, and provide full transparency. 

Co-operative Societies: Member-Owned and Controlled

In the UK, you can also establish a co-operative society – a business that is owned and run by its members. In this case, however, members can be customers, employees, or residents. 

Each member has an equal part in the decision-making process, no matter the size of their investment into the co-op. This creates a fair environment for all participants, based on democracy.

All profits are distributed among members and reinvested, where necessary. Just like social enterprises, co-ops usually focus on improving communities, social issues, and tackling important topics.

However, the drawbacks of this structure are that decisions can oftentimes be slow and inefficient, raising capital is difficult, and there are limited growth opportunities to strive towards. 

Choosing the Right Business Structure: Factors to Consider

Now that you know everything about the different business structures in the UK, there’s one posing question to address – how can you choose the right one for you?

Note that this decision is extremely important as it will shape vital aspects of running a business, like tax obligations, financial rewards, decision-making, and more. 

Some of the core factors to consider include:

• Liability protection – consider the implications of running a limited liability and unlimited liability business. 
• Tax implications – different business structures come with their individual tax obligations. Acknowledge these differences before making a decision.
• Control and management – assess the management opportunities and determine whether you prefer to have full control of the business or would rather work with a partner to meet your goals.
• Funding and investment – evaluate how likely you are to need to attract investors and raise funds for your business. 
• Industry and regulatory requirements – think about the legal implications of running each business structure and select an option that you can handle without legal conflicts. 

Starting a business is thrilling and exciting. However, it’s also associated with a lot of responsibility, hard decisions, and attention to detail.

Before you make this big step, make sure you’ve selected the business structure that will enable you to grow with confidence. 

Frequently Asked Questions

What are the most popular business structures in the UK?

The most popular business structures in the UK include sole proprietorships, limited companies, and business partnerships.

What should I keep in mind when choosing a business structure?

When choosing a business structure, it’s important to address things like liability protection, tax implications, regulatory requirements, management control, funding needs, administrative complexity, and long-term business goals.

Do different business structures have different tax implications?

Yes, you will be required to address tax differently based on the types of business structure you have registered. Make sure that you’re fully aware of the tax requirements associated with the structure you’ve set your eyes on as your future business.