Business Structures — SQE1 FLK1 Business Law and Practice

A woman has run a catering business on her own account for five years. A corporate client cancels a large event at short notice, and she cannot pay. £55,000 is owed to food suppliers, a landlord and an equipment lessor. The business assets are worth £20,000. She owns a house with £100,000 of equity, and £15,000 in savings. Can the creditors take the house? Yes.

Nothing she did wrong caused that. It was a decision she made before her first booking: what structure to trade through. This is Business Structures, the first topic in Business Law and Practice. Three questions run through all of it. Who has separate legal personality? Who gets limited liability? And how is each one taxed? Keep our caterer in mind. She comes back.

Here is the ladder. Sole trader at the bottom, simplest and least protected. Then the general partnership, still simple, still exposed, but shared. Then the limited liability partnership, which adds armour and paperwork. Then the private limited company. And at the top the public limited company, with the most rules of all. We climb it in that order, then compare them, then choose one for a client.

Sole trader first. A plumber, a freelance designer, a market stall owner working for themselves. No company, no partners, just one person and their business. Setting up is simple. No registration at Companies House, no complicated paperwork. You start trading. You keep all the profits, you make every decision, and you file one straightforward tax return. It is the go-to choice for small, low-risk businesses.

Now the catch. In the eyes of the law, you and your business are the same thing. No separate legal personality. So if the business owes money, you owe that money, and creditors can come after your house, your car, your savings. There is no legal wall. That is why our caterer's house was reachable, and a charging order over her interest in it is how a judgment creditor gets there.

Two more things about the sole trader. Profits are taxed as your personal income. And the business dies with you. No perpetual succession.

Step up a rung. A general partnership is sole traders who team up. Two or more people running a business together, sharing the profits and the risks. Traditional law firms, accounting practices, two friends opening a restaurant. The definition is worth knowing word for word, and it sits in section 1(1) of the Partnership Act 1890. Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.

Every word in that definition earns its keep. Try one. A man and a woman share a flat, split the rent and the bills equally, and own a car together. She also runs a small online shop from the flat, which he takes no part in. A supplier who has not been paid says the two are partners. Are they? No. Sharing the costs of a home is not carrying on a business, and the only business here is hers alone.

But you do not need a written agreement to be partners. Partnerships arise from how people behave, and you can be one without realising it. Two people agreed to open a restaurant. They signed a lease, bought equipment, fitted out the premises, and then fell out before opening day. One said there was no partnership because they had never traded. The House of Lords disagreed. That is Khan v Miah, from 2000.

A partnership begins when you start preparing for the business together, not when you first serve a customer. Preparatory activities count.

Now the price. Partners have unlimited personal liability, exactly like sole traders. Worse, you are liable for debts your partner runs up. If your partner orders £50,000 of supplies and disappears, the creditors can come after you for the full amount. Liability is joint for contract debts, and joint and several for torts. This is why so many professional firms moved to the LLP.

And if partners never write anything down, section 24 of the Partnership Act 1890 fills the gaps. Profits and losses split equally, whatever each partner put in. All partners may take part in management. No partner is entitled to a salary. And you need everyone's agreement to bring in a new partner. Three people open a café. One puts in £30,000, one £20,000, one £10,000. First year profit, £90,000. How is it split?

Equally. £30,000 each. The partner who put in £30,000 takes exactly the same share as the one who put in £10,000. She is not even entitled to interest on her capital before the profits are worked out.

The rest of the partnership picture. At least two partners, and since 2002 no maximum. No separate legal personality, so the partners are the business. No Companies House registration. Each partner taxed individually on their share. And the partnership dissolves automatically if a partner dies or goes bankrupt, unless the agreement says otherwise.

Third rung, and the mood changes. The limited liability partnership was created in 2000, precisely because accountants and lawyers wanted partnership flexibility with protection from personal liability. Think of a partnership wearing a suit of armour. Here is the magic, in section 1(2) of the Limited Liability Partnerships Act 2000. A limited liability partnership is a body corporate, with legal personality separate from that of its members.

So the LLP owns the assets, signs the contracts and, crucially, owes the debts. If the business fails, the LLP is liable, not the members personally. Take a firm of surveyors. A client sues over a negligent survey carried out by an employee. The LLP answers for it, on its retainer and for its employee. The members' own houses do not.

And here is what makes the LLP special. Even though it is a separate legal entity, the LLP itself pays no corporation tax. Profits pass through to the members, who pay income tax on their own shares. Limited liability without corporation tax. One warning, though. A member is taxed on their share as it arises, drawn or not. Leaving profit in the business defers nothing.

The paperwork comes with it. An LLP must register at Companies House, file accounts and file an annual confirmation statement, and its name must end in LLP. It also needs at least two designated members. They are the responsible adults: they sign the accounts, file at Companies House and deal with winding up. Name fewer than two, and every member becomes designated by default.

Fourth rung: the private limited company. From the corner shop to the tech startup, millions of businesses use it, and it has been a separate legal person from its owners since 1897. Mr Salomon ran a boot-making business. He turned it into a company and kept almost all the shares himself. When it failed, the creditors said it is basically just Mr Salomon, so he should pay. The House of Lords said no.

The company is a separate legal person. Even though Salomon owned nearly all the shares, the company's debts were not his personal debts. That is Salomon v A Salomon & Co Ltd, and it is the foundation of company law. Even a one-man company has its own legal identity.

So what do you actually risk? Only the money you paid, or promised to pay, for your shares. Pay £100 for your shares, and if the company goes bust owing millions, you lose your £100. That is it. The creditors cannot touch your personal assets. That is what limited means.

The requirements are light. One director, who must be a real person, and one shareholder. No minimum share capital, so you can start with a single £1 share. You must file accounts at Companies House, and they become public. You cannot offer shares to the public. And since 1 February 2026, digital incorporation costs £100.

There is a trade-off, and it is tax. Unlike a sole trader or a partnership, a company pays corporation tax on its profits. Then, if the shareholders take money out as dividends, they are taxed again on those dividends. That double charge is the price of limited liability and a separate legal identity.

Top rung. The public limited company, the Plc. Think Tesco and Barclays. The key difference is that a Plc can offer its shares to the public and can be listed on the stock exchange. But you cannot simply call yourself one. You need minimum share capital of £50,000, and at least £12,500, 25% of it, must be paid up before you can start trading.

That capital rule has teeth. Under sections 761 to 763 of the Companies Act 2006, a Plc must not do business or exercise any borrowing powers until it has a trading certificate. Companies House issues that certificate, confirming the minimum £50,000 with 25% paid up. Register as a Plc, start trading before the certificate arrives, and you have broken the rule.

A Plc also needs at least two directors, where a private company needs only one. It must have a qualified company secretary, where a private company needs none. And its name ends in Plc.

Now hold the whole picture. Separate legal personality: the LLP, the private company and the Plc. Not the sole trader, not the general partnership. Limited liability: exactly the same three. Tax-transparent, meaning no corporation tax: sole trader, general partnership and LLP. There is a hook for it. Slap, for Separate Legal personality And Protection. The three that Slap are the three that protect you.

So how do you choose for a client? Ask one question first. Do they need limited liability? If yes, ask whether they want to be taxed individually. Yes to both, and you are looking at an LLP. Limited liability but content with corporation tax, and it is a limited company. If they do not need limited liability, the question is simply whether they work alone. Alone, sole trader. With others, partnership.

A word on how SQE1 tests this. You will not be asked to recall a case name or a section number. You get a scenario, five answers, and one instruction: pick the best. Learn the rules. The names are memory pegs, nothing more.

If you keep only three pegs from this episode. Salomon v A Salomon & Co Ltd, where a one-man company still had its own legal identity and its debts stayed its own. Khan v Miah, where a restaurant that never opened was already a partnership. And section 1(1) of the Partnership Act 1890, the definition that decides whether people are partners at all.

Four traps. One: a business name is not a legal person. Trading under something other than your own name creates no separate entity, registers nothing, and protects nothing. Our caterer's business name did not save her house.

Two: a partnership needs no agreement, no registration and no formality. It arises from conduct, and the test is objective. Two freelance photographers who share fees, use each other's equipment, hold a joint account and present themselves to clients under one name are partners, whatever they call themselves.

Three: the default profit split ignores capital entirely. Under section 24, the partner who put in the most money and worked the longest hours takes exactly the same share as everyone else. Only a written agreement changes that.

Four: separate legal personality and corporation tax do not travel together. The LLP has its own legal personality, and its members still pay income tax. That pairing is one the examiners come back to again and again, and it is coming up right now.

Quick check. Two accountants intend to leave their firm and practise together. Each will put £25,000 in, and both will work full time and take part in management. They want to divide the profits unequally, in different proportions from year to year, according to the fees each has generated. They want to be taxed personally on their profit shares, not have the business taxed on its own profits. And neither will put personal assets at risk.

Which structure should they adopt? Three candidates. One: a limited liability partnership, because it gives limited liability while the members are taxed individually. Two: a general partnership, because the partners are taxed individually and may agree any profit share. Three: a private limited company, because it gives limited liability and profits can be paid out as dividends. Pause here if you want a moment.

The answer is one. The LLP meets all three requirements. It is a body corporate with legal personality separate from that of its members. So the members are not personally liable for its debts, and their own assets are not at risk. It pays no corporation tax, and each member is charged income tax on their share. And the members' agreement can allocate profits in different proportions each year.

Why the others fail. Option two gives individual taxation and any profit share you like, but no limited liability: partners are liable without limit for the firm's debts. Option three gives limited liability, but the company pays corporation tax and shareholders are taxed again on dividends.

Five things to take away. One: separate legal personality belongs to the LLP, the private company and the Plc. Not to the sole trader, not to the general partnership. Two: limited liability follows exactly the same three. Our caterer had neither, which is why her house was reachable and £55,000 of business debt became her debt.

Three: tax transparency is a different list. Sole trader, general partnership and LLP are taxed individually. Companies pay corporation tax, and their shareholders pay again on dividends. Four: a partnership needs no agreement and no registration, it starts when you start preparing, and section 24 splits profits equally whatever the capital. Five: only a Plc can sell shares to the public, and only a Plc needs £50,000 with £12,500 paid up. Next time, Partnerships.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.