Choosing the right business structure from a tax perspective

When you start a business, one of the first decisions you’ll make is how to structure it. The choice between being a sole trader, forming a partnership, or setting up a limited company affects everything. From how you pay tax to how much protection you have if things go wrong.

There’s no single answer that suits everyone. But understanding the tax implications of each structure can help you make a smart, informed choice.

Sole trader: simple and flexible

Being a sole trader is the easiest way to start trading. You work for yourself and keep all the profits after tax.

You’ll pay Income Tax on your profits only. Not on what you withdraw. Through Self Assessment. You’ll also pay Class 2 and Class 4 National Insurance contributions.

The benefits are simplicity and control. You make the decisions, you keep the records, and you have full ownership. But you also take full financial responsibility. If something goes wrong, your personal assets could be at risk.

This route suits freelancers, consultants, and one-person operations. But as profits grow, the tax savings of becoming a company may outweigh the convenience of staying solo.

Partnership: shared ownership and shared tax

A partnership is similar to being a sole trader but with more than one person involved. Each partner is taxed on their share of the profits.

You’ll each complete a personal tax return. You pay Income Tax and National Insurance in the same way as a sole trader. The partnership must also submit a separate return showing the total profits.

Partnerships can work well where two or more people bring different skills or clients. But disagreements can be costly. You are still personally liable for business debts unless you form a limited liability partnership (LLP).

An LLP can offer more protection, but the tax rules are broadly similar to a standard partnership.

Limited company: more structure, more potential savings

A limited company is a separate legal entity. You become a shareholder and may also act as a director. This setup creates a clear line between your business and personal finances.

Companies pay Corporation Tax on their profits. You then pay yourself through salary and dividends. Which are both taxed differently from income.

This structure can lead to tax efficiency, especially once profits rise beyond a certain point. It can also help build credibility with clients, suppliers, and lenders.

However, there are more administrative tasks. You’ll need to file annual accounts and returns with Companies House and HMRC. Mistakes can lead to penalties, so professional help is often worthwhile.

Which structure saves the most tax?

It depends on your income, future plans, and personal situation. In general:

• Sole traders pay Income Tax and National Insurance directly on profits.
  
• Companies can retain profits and pay dividends, often resulting in lower overall tax.
  
• Partnerships are flexible but expose partners to more risk.
  

A specialist tax advisor can model the numbers and show which option fits your goals. What looks cheaper now might not be best long-term. Speak to the team at Eaves and Co and see if we can help.

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Planning ahead

Choosing the right structure is only the first step. Regular reviews matter. As your business grows, what once worked may not be efficient anymore.

Eaves & Co can help you with tax planning for businesses, compliance, and long-term strategy. Helping you to stay efficient, protected, and ahead of HMRC.

FAQs

Is it cheaper to be a sole trader or a limited company?
At lower profit levels, being a sole trader is often simpler and cheaper. Once profits grow, a limited company may save tax. But it depends on your income and how you draw money from the business.

Can I switch from sole trader to limited company later?
Yes. Many businesses start as sole traders and incorporate when profits rise. A specialist tax advisor can help you transfer assets and set up correctly.

Do partnerships pay Corporation Tax?
No. Partnerships and LLPs don’t pay Corporation Tax. Each partner pays Income Tax on their share of the profits instead.

What about liability and risk?
Sole traders and traditional partnerships have unlimited liability. This means your personal assets are at risk. Limited companies and LLPs offer legal protection, separating your personal and business finances.

Can Eaves & Co help with complex setups or group structures?
Absolutely. Our business tax planning team works with companies of all sizes, from startups to established firms, helping owners make tax-efficient decisions from day one.