Types of business ownership

By Team Starling

Deciding to start your own business is one thing, but figuring out what type of business it should be is another. That’s worth its very own Business Guide. Here, we cover some of the most common business types: sole trader, private limited company and business partnership. We look at what these different types of business mean, for things like tax liability and admin.

Sole trader

What is a sole trader?

Sole traders are sometimes called ‘sole proprietors’. Generally speaking, this means a one person show, but sole traders can have employees. As a sole trader, there’s unlimited liability and no legal distinction between the business and the owner – which essentially means all business losses and profits (after tax) are yours.

Sole proprietors aren‘t required to register with Companies House, but they must notify HMRC and register to pay tax through Self Assessment.

Sole proprietor requirements

• Have a unique business name
• Keep on top of your income and expenses for your tax return
• Register for Self Assessment with HMRC
• Register for VAT if needed. There is an obligation if turnover is over £85k.

Sole proprietor advantages

• Low cost
• Easy to set up
• Full control

Sole proprietor disadvantages

• You’re fully liable for debts
• It can be harder to separate business finances from personal finances

Learn more about the advantages and disadvantages of the sole trader business type.

Want to know more about the sole trader business type and how to set up? Read our in-depth guide on how to set up as a sole trader.

Private limited company (LTD)

What is a private limited company?

Businesses that have ‘LTD’ or ‘Limited’ in their names are private limited companies. Another label for them is ‘private company limited by shares’ because they’re managed and owned by private shareholders who invest in them.

Unlike sole traders, private limited companies are entities in themselves, meaning there’s a legal distinction between the business and its owners. As the name suggests, this business type has limited liability, which means that a shareholder’s financial responsibility is limited to a specific sum (often the sum of that person’s initial investment in the business). Private limited companies need at least one director and one shareholder.

Private limited companies are registered with Companies House, where their filing history is made public.

Private limited company requirements

• Have a unique business name
• Have at least one director
• Have at least one shareholder (who can be the director)
• Have a registered office address in the UK
• Submit a ’memorandum of association’ and ’articles of association’
• Keep on top of accounting records
• Register for Corporation Tax with HMRC
• Register the company with Companies House
• Keep a ’person with significant control’ (PSC) register

Private limited company advantages

• Less personal financial risk
• Protected by limited liability
• Enhanced reputation and professional image

Private limited company disadvantages

• More costly to set up
• Less privacy (anyone can view your annual accounts and financial reports)

Learn more about the advantages and disadvantages of limited companies.

Want to know more about private limited companies and how to set one up? Read our guide on how to set up a limited company.

Business Partnership

Last but not least, there are business partnerships – which have their own sub-categories (bear with us). There are various types of business partnerships, but most will either be general partnerships or limited liability partnerships (LLP).

These partnership types have a lot in common. They’re both entities of two or more individuals and/or businesses that are required to share all their profits (unless agreed otherwise).

In business partnerships, each partner must keep records of income and expenses and pay taxes on their share of the profits through HMRC’s Self Assessment. Business partnerships also must have a ‘nominated’ or ‘designated’ partner, who can assume any additional legal responsibilities, such as filing tax returns for the partnership itself.

Starling currently offers business accounts to LLPs but unfortunately we cannot yet support general partnerships.

General partnership

What is a general partnership?

A general partnership is probably the simplest way for two or more partners to manage a business. Each partner has to invest their time, effort and money into the business and they are equally responsible for managing the business.

General partnerships are similar to the sole trader structure in as much as they aren’t considered legal entities in themselves and they don’t need to register with Companies House.

Each partner is essentially self-employed, which means they each need to pay tax on their profits. The partners also have unlimited liability, making them personally responsible for debts and losses (and if one partner is unable to meet their debts, the other(s) will be liable to pay those debts off).

General partnership requirements

• Have a unique business name
• Have a ‘nominated’ partner
• Partners must register for Self Assessment
• Keep a record of income and expenses
• Register for VAT if needed
• Register for PAYE if needed

General partnership advantages

• Easy to set up
• Combined resources

General partnership disadvantages

• No independent legal status
• Partners have full liability (meaning that partners can be held accountable and financially liable for each other’s debts)

Want to know more about business partnerships and how to set one up? Read our guide on setting up a business partnership.

Limited liability partnership (LLP)

What is a limited liability partnership?

Just like limited companies, LLPs have to be registered with Companies House and they have similar requirements for reporting and filing.

Limited liability partnerships must have at least two partners at all times, which can be individuals and/or companies. The partners of an LLP have limited liability – so they’re each responsible for their own profits and losses, not those of the whole business. LLPs don’t pay Corporation Tax, but the business and all its members must register to pay tax through Self Assessment.

Limited liability partnership requirements

• Have a unique business name
• Have a registered address in the UK
• Have at least two partners at all times
• Have least two ‘designated’ partners to assume additional legal responsibilities
• Have an LLP agreement that explains how the business will be run
• The business itself and all its members must register for Self Assessment
• Register with Companies House
• Provide Companies House with a SIC code
• Register for VAT if needed
• Keep on top of accounting
• Keep a ’person with significant control’ (PSC) register

LLP advantages

• Flexibility: you define how the company operates and how the profits are split in your partnership agreement
• All the best bits of a limited company and partnership combined

LLP disadvantages

• Partners are required to disclose income
• LLPs must start trading within a year of registration

Want to know more about LLPs and how to set one up? Read our guide on setting up a limited liability partnership.

Choosing a business type

Choosing a business type is the first step towards realising your start-up dream. Whichever business type is right for you, it’s important that you research your options and look into what is required for each structure. But keep in mind that, in many cases, your business structure can evolve as your company does.

Even if you start off as a sole trader, your company type isn’t set in stone. Later on, you may decide that changing circumstances mean it makes more sense to enter into a partnership, or choose to incorporate.