Imagine you're helping a client start their dream business. Before they can open their doors, they need to answer one crucial question: What type of business structure should they use? This decision affects everything - from whether they could lose their house if things go wrong, to how much tax they'll pay, to how much paperwork they'll deal with.
There are five main options in England and Wales: sole trader (going it alone), general partnership (teaming up informally), LLP (teaming up with protection), private limited company (the classic 'Ltd'), and public limited company (the big league 'Plc'). Let's break down each one.
Three things come up again and again: (1) Who has 'separate legal personality'? (2) Who gets limited liability? (3) How is each structure taxed? Master these differences and you'll nail the exam questions.
A sole trader is the simplest way to run a business. Think of a plumber, freelance designer, or market stall owner working for themselves. There's no company, no partners - just one person and their business. In the eyes of the law, YOU and YOUR BUSINESS are the same thing.
Setting up is dead simple. No registration with Companies House, no complicated paperwork. You just start trading! You keep all the profits, make all the decisions, and file one straightforward tax return. It's the go-to choice for small, low-risk businesses.
Here's the catch - and it's a big one. If your business owes money, YOU personally owe that money. Creditors can come after your house, your car, your savings - everything you own. There's no legal wall between your business debts and your personal assets. If the business fails with £100,000 of debt, that's YOUR debt.
A partnership is basically "sole traders who team up." Two or more people running a business together, sharing the profits (and the risks). Think of traditional law firms, accounting practices, or two friends opening a restaurant together.
"Partnership is the relation which subsists between persons carrying on a business in common with a view of profit."
Here's something that catches people out: you don't need a written agreement to form a partnership. If you and a friend start working together to make money, you might already be partners without realising it! Partnerships can arise just from how people behave.
Just like sole traders, partners have unlimited personal liability. Even worse - you're liable for debts your partner runs up! If your partner orders £50,000 of supplies and disappears, creditors can come after YOU for the full amount. This is why many professionals now use LLPs instead.
If partners don't agree otherwise, the Partnership Act 1890 s.24 fills the gaps: profits and losses split EQUALLY (even if one partner put in more money!), all partners can join in management, no partner gets a salary, and you need everyone's agreement to add a new partner.
The LLP is the "best of both worlds" structure. It was created in 2000 specifically because professionals like accountants and lawyers wanted partnership flexibility BUT with protection from personal liability. Think of it as a partnership wearing a suit of armour.
Unlike a regular partnership, an LLP is its own legal "person." The LLP owns the assets, signs the contracts, and - crucially - owes the debts. If the business fails, it's the LLP that's liable, not the members personally. Your house is safe!
"A limited liability partnership is a body corporate (with legal personality separate from that of its members)."
Here's what makes LLPs special: even though it's a separate legal entity, the LLP itself doesn't pay tax. Instead, profits "pass through" to members who pay income tax individually - just like a regular partnership. You get limited liability WITHOUT corporation tax!
Every LLP must have at least 2 'designated members' - they're like the responsible adults. They sign the accounts, file paperwork with Companies House, and deal with winding up if needed. If you don't pick any, ALL members become designated by default!
The 'Ltd' company is probably the most common business structure you'll encounter. From your local corner shop to tech startups, millions of businesses use this structure. A company is a completely separate legal person from its owners - and that's been the law since 1897.
[1897] AC 22
Mr Salomon ran a boot-making business. He turned it into a company, owning almost all the shares himself. When the company failed, creditors argued: "Come on, it's basically just Mr Salomon - he should pay the debts!"
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.
This is the foundation of company law: a properly formed company is separate from its shareholders. Even a 'one-man company' has its own legal identity.
When you buy shares, you're only risking the money you paid (or promised to pay) for those shares. If you paid £100 for your shares and the company goes bust owing millions, you lose your £100 - but that's it. Creditors can't touch your personal assets. That's the beauty of 'limited' liability.
Unlike sole traders and partnerships, a company pays corporation tax on its profits. Then, if shareholders take money out as dividends, they pay tax again on those dividends. This 'double taxation' is the price you pay for limited liability and a separate legal identity.
A Plc is the 'big league' - think Tesco, Barclays, BP. The key difference? A Plc CAN offer its shares to the public and can be listed on the stock exchange. But with that power comes much stricter rules.
You can't just call yourself a Plc. You need minimum share capital of £50,000, and at least £12,500 (25%) must be paid up before you can start trading. This protects the public who might invest - they know there's real money behind the company.
A Plc must not 'do business or exercise any borrowing powers' until it gets a trading certificate from Companies House, confirming it has the minimum £50,000 share capital with 25% paid up.
| Feature | Sole Trader | Partnership | LLP | Ltd | Plc |
|---|---|---|---|---|---|
| Separate Legal Person? | No | No | Yes | Yes | Yes |
| Limited Liability? | No | No | Yes | Yes | Yes |
| Min. People | 1 | 2 | 2 | 1 | 1 |
| Register at Companies House? | No | No | Yes | Yes | Yes |
| How Taxed? | Income Tax | Income Tax | Income Tax | Corp Tax | Corp Tax |
| Min. Capital | None | None | None | None | £50,000 |
| Sell Shares to Public? | No | No | No | No | Yes |
| Structure | Personal Liability | What You Risk | Protection Level |
|---|---|---|---|
| Sole Trader | Unlimited | Everything you own | None |
| Partnership | Unlimited | Everything you own | None |
| LLP | Limited | Capital contribution | High |
| Ltd | Limited | Share value | High |
| Plc | Limited | Share value | High |
| Structure | Registration | Documents | Cost | Time |
|---|---|---|---|---|
| Sole Trader | HMRC only | None | Free | Instant |
| Partnership | HMRC only | Optional agreement | Free | Instant |
| LLP | Companies House | Form LL IN01 | £50 | 24-48 hrs |
| Ltd | Companies House | IN01 + Articles | £50 | 24-48 hrs |
| Plc | Companies House | IN01 + Articles | £50 | + Trading cert |
Think of business structures as a ladder of complexity and protection: At the bottom is SOLE TRADER (simplest, no protection). Next is PARTNERSHIP (still simple, still no protection, but shared). Then LLP (adds protection, adds paperwork). Then PRIVATE LTD (full company status, more rules). At the top is PLC (maximum rules, can go public). As you climb up, you get more protection but more obligations!
When advising clients, think about: How risky is this business? (High risk = need limited liability). How many owners? (Solo = sole trader or Ltd; Multiple = partnership, LLP, or Ltd). What about tax? (High earners might prefer company). Will they need outside investment? (Investors usually want a company). How much admin can they handle? (Sole trader = minimal; company = more paperwork).
[2000] 1 WLR 2123
Two people agreed to open a restaurant. They signed a lease, bought equipment, and fitted out the premises. Before opening day, they fell out. One claimed: "We never actually traded - so there was no partnership!"
The House of Lords disagreed. A partnership existed from when they started preparing the business - signing the lease, buying equipment. You don't need to actually open for business.
A partnership begins when you start PREPARING for business together, not when you start trading. The test is: are you 'carrying on a business in common with a view of profit'? Preparatory activities count!
SLAP = Separate Legal personality And Protection. LLPs, Ltds, and Plcs have both (they SLAP). Sole traders and partnerships don't - they get SLAPPED by creditors who can take personal assets!
Remember these patterns: (1) Separate legal personality = LLP, Ltd, Plc (based on Salomon). (2) Limited liability = same three (LLP, Ltd, Plc). (3) Tax-transparent (no corp tax) = Sole trader, Partnership, LLP. (4) Only Plc can sell shares to the public. (5) Only Plc needs £50,000 minimum capital.