What are the types of business organisations?

When setting up your business, you’ll need to decide on the type of business structure you’ll use. The structure you choose will impact how you run your business and the amount and type of tax you’ll pay. It could also impact the degree of personal consequences (also known as personal liability) you’ll face if the business fails, the amount of admin work you’ll need to do and your ability to get financial backing (if needed).

Making the wrong choice now could cause unnecessary headaches and complications later on down the road. Our guide will provide all the information you need to answer the question “what are the types of business organisations?” and how to make the right decision for your new company.

We’ll cover the four different types of business organisations, including:

• Sole traders
• Limited Companies
• Partnerships
• Limited Liability Partnerships

There are typically four main types of business structures in the UK: partnerships, limited liability partnerships, sole traders, and limited companies. Of course, as a one-person company, you’re most likely to choose between a sole trader and limited company status. 

But, it’s essential to know about partnerships and limited liability partnerships if you ever decide to bring another owner or founder (often referred to as a majority shareholder) into the company.

Registering as a sole trader is pretty straightforward. Anyone who works for themself can be a sole trader, but it’s important to register your business with HMRC (read our guide on it here). 

As a sole trader, you own and run your business, which means you reap the rewards and can keep your profits as income. But, you will need to pay tax and National Insurance by completing a Self Assessment tax return. While you aren’t limited on how much you can earn, generally, the more you make, the less tax-efficient it becomes to be registered as a sole trader.

Read more about setting up as a sole trader in our article 10 things you should know about setting up as a sole trader.

You decide to set up a small cake making business from your home, selling custom cupcakes online as part of your income. You’ve only just started, so you are working on building your business and aren’t making hefty profits yet and might decide to register as a sole trader for now.

Limited companies are privately managed businesses that are owned by their shareholders and run by their directors. You can be both a shareholder and director, which is especially common in the early stages of starting and running a business.

Limited companies are separate legal entities, so they have their own legal rights and responsibilities. The company is responsible for any profits and losses, which means that your finances must be separate from the company’s (often by setting up a business current account). 

As a limited company, you’ll need to pay Corporation Tax on any profits and can then decide to pay yourself (as a shareholder) on payroll, by dividends or a combination of both. Limited companies may be limited by shares or guarantees and must meet annual reporting and filing requirements with Companies House and HMRC. 

Your cake business grows, so you decide to switch from being a sole trader to a limited company. As a limited company, you then pay Corporation Tax on your growing profits and pay yourself in dividends and payroll.

Partnerships are when two or more people agree to share the company’s profits or losses and its risks, costs, benefits and responsibilities. In legal speak, partnerships are often referred to as unincorporated entities as both partners are technically self-employed and personally responsible for any losses or debts the business experiences.

Each partner is responsible for the other partner’s actions as profits and losses. Typically, there’s an agreement to determine how much of the profits each partner gets, and each partner is then responsible for paying tax on their share.

Say, for example, you meet a delivery company during the early days of your cake business and decide to join efforts and go into business together by setting up a new company. This new company is likely to take the form of a partnership.

Limited Liability Partnerships are similar to partnerships, but your liability is limited to the amount of money you invest in the business, which could significantly reduce your risk. As a partner, you’ll be responsible for registering your LLP with Companies House and HMRC and then preparing and filing annual accounts. 

You’ll also need to complete a Self Assessment tax return and pay income tax on your part of the profits each year. Since partners are technically self-employed, you may also need to pay National Insurance.

Read our latest article on how to do a Self Assessment tax return.

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