Business Structures in the UK: How to Choose the Right One (2026/27)

Published: 19 September 2026 | Last updated: September 2026 | Figures apply to the 2026/27 tax year (6 April 2026 to 5 April 2027)

Choosing a business structure feels like paperwork, but it quietly decides a lot: who pays if things go wrong, how your profit is taxed, what the public can see about you, and how easily you can bring in a partner or sell up later.

Plenty of guides will tell you a limited company is “more tax-efficient”. At 2026/27 rates, that’s often not true for owners who take all their profit out. This guide explains each structure in plain English, runs the actual numbers, and gives you five questions to settle the decision.

What is a business structure, and why does it matter?

A business structure, sometimes called a legal structure or business entity, is the legal form your business takes. It sets out whether the business exists separately from you or whether, in law, you and the business are one and the same.

That single question drives four practical outcomes:

• Liability: whether your home and savings are at risk if the business can’t pay its debts.
• Tax: whether profit is taxed as your personal income or first as company profit.
• Admin: which returns you file, with whom, and what becomes public.
• Growth and exit: how easily you can take on investors, add owners or sell.

GOV.UK’s guide to setting up a business notes that most people register as a sole trader or limited company, and that moving from sole trader to company is usually easier than going the other way.

The main types of business structure in the UK

Sole trader

You run the business as an individual. There’s nothing to set up at Companies House: you tell HMRC you’re self-employed and report your profit through Self Assessment. You keep every pound of profit after tax, and you make every decision. The trade-off is unlimited liability. If the business owes money it can’t pay, creditors can pursue your personal assets. Most sole traders keep their money separate by opening a dedicated sole trader bank account, even though the law doesn’t require one.

General partnership

Two or more people run a business together and share the profit. Each partner pays Income Tax and National Insurance on their own share, and the partnership files its own return as well. Like sole traders, partners are personally liable, and each partner can be on the hook for debts another partner ran up. A written partnership agreement covering profit shares, decision-making and what happens when someone leaves is essential, even between friends.

Limited liability partnership (LLP)

An LLP is taxed like a partnership, with members paying Income Tax on their share, but it’s a separate legal entity, so members’ personal liability is limited. It needs at least two designated members, registers at Companies House and files public accounts. You’ll mostly see LLPs in professional firms such as accountants, solicitors and consultancies.

Private limited company

A company is a legal person in its own right. It owns its assets, signs its own contracts and pays Corporation Tax on its profits. You take money out as salary, dividends or both. Shareholders usually risk only what they’ve put in. In return, you accept more formality: annual accounts, a Corporation Tax return, a confirmation statement, and details about you on the public register.

Other structures

A few less common forms suit specific situations:

• Community interest company (CIC): for social enterprises. It has an “asset lock” that keeps profits and assets working for the community.
• Company limited by guarantee: used by charities, clubs and membership bodies. Members guarantee a small fixed sum instead of holding shares.
• Limited partnership: mixes general partners (who manage and carry full liability) with limited partners (who invest but don’t manage). It’s mostly used for investment funds.
• Public limited company (PLC): can offer shares to the public. It needs at least £50,000 of share capital, so it’s rarely a starting point.

Liability protection and public disclosure tend to arrive together.

Which structure pays less tax? (2026/27 figures)

No structure always pays less tax. At 2026/27 rates, a sole trader taking home all their profit often keeps slightly more than a limited company owner at profits of £30,000 to £80,000, once employer National Insurance and higher dividend tax are counted. Companies gain when profits are left in the business or paid into pensions.

How each structure is taxed

Sole traders and partners pay Income Tax on profit above the £12,570 Personal Allowance, at 20%, 40% and 45%. They also pay Class 4 National Insurance, which for 2026/27 is 6% on profits between £12,570 and £50,270 and 2% above that.

Limited companies pay Corporation Tax first: 19% on profits up to £50,000, rising to 25% at £250,000, with marginal relief in between. The owner then pays personal tax on whatever they take out:

• Salary: the company pays 15% employer National Insurance on salary above £5,000. A company whose only employee is its director generally can’t claim the Employment Allowance to offset this.
• Dividends: after a £500 allowance, dividends are taxed at 10.75% (basic rate) and 35.75% (higher rate) for 2026/27. Both rates rose by two percentage points this April.

Our guide to the full 2026/27 rate tables covers every band in detail.

Illustrative example: take-home at £30,000, £50,000 and £80,000 profit

At 2026/27 rates, taking all profit out of a company rarely beats sole trading at these profit levels.

Two changes explain the result. Employer National Insurance now bites from £5,000 of salary, and dividend tax went up this year. Add the higher accountancy costs a company usually brings, and the gap widens further. The old rule of thumb that “you should incorporate once you earn £40,000 or so” was built on rates that no longer apply.

When a limited company does come out ahead

The company’s advantage is control over timing. Suppose the £80,000 owner in our example only needs about £46,000 a year to live on. They take the £12,570 salary plus £37,700 of dividends, which stays inside the basic rate band, and leave the rest in the company. Total tax that year is about £18,953, against £22,289 for the sole trader: roughly £3,300 less. About £14,800 remains in the company.

That’s a deferral, not a disappearance. The retained money is taxed when you eventually draw it out. But it’s valuable if you plan to reinvest, want to even out your income across good and lean years, or expect to pay in more tax-efficiently later. Company pension contributions help too: they’re usually deductible for Corporation Tax and carry no National Insurance.

How “limited” is limited liability?

Limited liability means the company’s debts belong to the company, not to you. In practice, that protection has holes that catch many first-time directors.

• Personal guarantees: banks, landlords and some suppliers ask directors of small companies to guarantee debts personally. Sign one, and you’re back to unlimited liability for that debt.
• Directors’ duties: if you keep trading when you knew, or should have known, the company couldn’t avoid insolvent liquidation, you can be made personally liable for losses. This is known as wrongful trading.
• Disqualification: serious misconduct can lead to a ban from acting as a director.

For many lower-risk sole traders, the realistic dangers (a customer claim, an accident on site) are better handled by public liability or professional indemnity insurance than by incorporating.

Admin and running costs compared

A company means more filings and more of your details on the public record.

Two details are easy to miss. First, the MTD threshold is based on gross income (turnover), not profit, so a sole trader with £55,000 of sales and £25,000 of profit is already in scope. HMRC’s Making Tax Digital eligibility guidance sets out the dates. Second, Companies House raised its fees from 1 February 2026, so older guides quoting a £50 or £12 incorporation cost are out of date.

How to choose: five questions to ask yourself

Work through these in order. Most people have their answer by the third.

1. Are you going it alone or with others? Alone points to sole trader or company. With others points to partnership, LLP or company, and you’ll need a written agreement whichever you choose.
2. How much could go wrong, and could insurance cover it? If a single bad contract, product fault or large debt could cost you your home, limited liability matters. If insurance covers the realistic risks, it matters less.
3. Will you take all the profit out each year? If yes, the sole trader route often leaves you with more at 2026/27 rates. If you’ll leave profit in to grow, a company’s timing flexibility starts to pay.
4. Do you need outside money or plan to sell? Investors buy shares, and shares need a company. A company also makes a future sale simpler, because the buyer can take over the shares rather than individual assets.
5. How much admin and publicity will you accept? If you want the lightest paperwork and no public record, sole trader wins. If you’re comfortable with accounts, payroll and a public register entry, a company is workable.

Can you change your business structure later?

Yes. Many businesses start as sole traders and incorporate as profits or risks grow. Moving to a limited company means setting up the company, transferring assets and contracts, and telling HMRC you’ve stopped trading as self-employed. Incorporation relief can defer Capital Gains Tax on the transfer if the whole business moves for shares.

Expect a list of practical changes: a new business bank account, customer and supplier contracts moved into the company’s name, updated invoices and website details, and possibly a transfer of your VAT registration. Timing matters too, because your final sole trader tax return and the company’s first year overlap. Your structure also shapes any eventual exit, as our guide to how structure affects selling a business later explains.

What most people get wrong

Incorporating “to look professional”. Customers rarely check. A good website, clear terms and prompt invoices do more for credibility than “Ltd” after your name, and they don’t come with annual filings.

Relying on an out-of-date rule of thumb. Advice to incorporate at a set profit level was built on older dividend and National Insurance rates. At 2026/27 rates, what decides it is how much profit you’ll leave in the business, not how much you make.

Assuming limited liability survives a personal guarantee. It doesn’t. Before you rely on a company for protection, count how many guarantees your bank and landlord will expect you to sign.

Common mistakes when choosing a business structure

• Going into partnership on a handshake. With no written agreement, disputes over profit shares or an exit fall back on default legal rules that rarely suit anyone.
• Using your home as the registered office without thinking. It appears on the public register. A separate address keeps your home private.
• Treating company money as your own. Taking cash from a company without it being salary, dividends or a properly recorded loan creates tax problems.
• Forgetting MTD when staying a sole trader. Budget for compatible software if your turnover is near the thresholds.
• Choosing on tax alone. A saving of a few hundred pounds rarely outweighs a real liability risk, or years of admin you’ll resent.

Practical next steps

1. Write down your expected profit for the first two years, and how much of it you’ll actually need to live on.
2. List the worst realistic things that could go wrong, and price the insurance that would cover them.
3. If you’re starting with others, agree a written partnership agreement or shareholders’ agreement before trading.
4. Once you’ve chosen, follow our step-by-step registration for each structure.
5. Check again in 12 months: profit, risk and plans change, and your structure can change with them.

Frequently asked questions

What are the main business structures in the UK?

The main UK business structures are sole trader, general partnership, limited liability partnership (LLP) and private limited company. Sole traders and partners are personally liable for business debts; LLPs and companies are separate legal entities that limit that risk. Charities and social enterprises can also use a community interest company or a company limited by guarantee.

What is the difference between a sole trader and a limited company?

A sole trader and their business are legally the same, so the owner keeps all profits but is personally liable for debts. A limited company is a separate legal entity: it owns its assets, pays Corporation Tax on profits, and shareholders’ risk is usually limited to what they invested. Companies face more public reporting.

Which business structure pays the least tax?

No single structure always wins. In our 2026/27 model, a sole trader who draws all profit keeps around £1,000 to £2,000 more a year than a company owner at profits from £30,000 to £80,000. A company can pay less tax in the year itself when profit is retained or paid into a pension.

Can I change my business structure later?

Yes. Most changes run from sole trader to limited company. You set up the company, move assets, contracts and bank arrangements across, and tell HMRC your self-employment has ended. If the whole business transfers in exchange for shares, incorporation relief can defer Capital Gains Tax on the assets moved.

What is an LLP?

A limited liability partnership (LLP) is a separate legal entity where members’ liability is limited, but profits are taxed like a partnership: each member pays Income Tax and National Insurance on their share. An LLP needs at least two designated members, registers with Companies House and files public accounts. It is popular with professional firms.

Which business structure is best for a side business?

For most side businesses, sole trader is the simplest starting point. You don’t need to register with HMRC until your gross trading income passes the £1,000 trading allowance in a tax year, and then you report profits through Self Assessment. Consider a limited company if the work carries significant liability risk or you want to bring in investors.

Are limited company directors’ details public?

Yes, partly. Companies House publishes each director’s name, month and year of birth, nationality and a correspondence address, plus the company’s registered office and accounts. Your home address stays private if you give a separate service address. Sole traders have no public register entry, which is one reason some people prefer the structure.

The bottom line

There’s no universally “best” business structure, only the one that fits your risk, your plans and how you’ll use your profit. At 2026/27 rates, the sole trader route is often simpler and no more expensive in tax for owners who take everything out. A company earns its keep when you need real liability protection, outside investment, or the freedom to leave profit in the business.

If you’re weighing the options with real figures, the team at Eternity Accountants can help with structure and tax planning for new businesses.