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Which legal form should I choose for my business?

Jun 03, 2015

There are three main types of legal forms to choose from when starting a business.


Sole trader

You can choose to be a sole trader, which is not a legal structure as such. You are simply self-employed. This is often a good option when starting a business, but you will have to keep in mind that personal assets wouldn’t be protected and you could therefore potentially loose your own possessions. So let’s go through all the pros and cons of being a sole trader.


  • Simple unaudited accounts
  • Low national insurance
  • Tax payments often lower than for a limited company
  • No special setup; A single call to HMRS is enough
  • Business can be transferred to a limited company at a later stage
  • Privacy of accounts. Accounts are not publicly accessible.


  • You are personally liable. Any personal assets would be at risk of being lost, should the company encounter debts
  • It is much harder to raise money
  • Fewer social security benefits entitlements
  • Much harder to sell the business


Limited Company

A limited company is a separate legal entity that acts in its own name.


  • Limited liability – As indicated in the name, a private limited company has limited liability, which means your responsibility is limited to the amount you have invested in the company. Your personal assets are therefore protected.
  • More credibility – A limited company gives the added credibility an individual (sole trader) unfortunately doesn’t have, which in turn makes it easier to raise money.
  • Easier to sell the business or part of it through shares
  • Some tax benefits for high earners


  • You must register a company through Companies House. This is however easy and you should then be in possession of a brand new limited company within 3 to 8 hours of registering it.
  • You must appoint at least one director, who has to be a physical person. It is no longer necessary to appoint a secretary, but the option is there is you wish to do so.
  • Annual return & annual accounts filing, as well as other legal requirements such as self-assessment.


Limited Liability Partnership

Just like a Private Limited Company, a LLP is a separate legal entity that acts in its own name. It is necessary to get a partnership agreement drawn.


  • Limited Liability – This is usually limited to the amount the members have invested in the partnership
  • Organisational flexibility of a partnership



  • Filing requirements such as Annual accounts have very strict time limits
  • Lack of financial privacy. The accounts tend to have to be disclosed.


Other legal forms of business do exist, such as Right to Manage (RTM) or Charity, which tend to be for a more specific purpose.



Karen Horne


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