There are 3 main types of UK business and each has various tax and liability implications.
1. Sole Trader
2. Partnership - Limited liability partnership, General partnership & Limited partnership
3. Private Limited Company - Private Limited by Share & Private Limited by Guarantee
This is the most straightforward type of business to register. If you start working for yourself, you are a self-employed sole trader, and you must register your business with HMRC. As a Sole Trader, the business is solely run by you.
As a result, you are entitled to keep all profits as income, but you must pay tax and national insurance by filling out a Self Assessment Tax Return. There is no maximum amount you can earn, but it can become less tax-efficient in higher tax brackets.
You will be liable for all liabilities, including personal assets and those jointly owned with another person.
Also read: 8 Important Steps for the UK Company Setup
A partnership is formed when two or more people agree to split the company's profits and losses. They share the risks, costs, benefits, and responsibilities that come with running a business. Profits and losses from a partnership are shared among the partners.
Limited Liability Partnership:
An LLP can be formed with two or more members and a member can be an individual or a company. The liability of the partners is limited to the amount of money they invest in the business. The LLP must be registered with both Companies House and HMRC. Annual accounts must also be prepared and filed.
An LLP agreement specifies each member's responsibilities and profit share, and all members must file a personal Self Assessment Tax Return each year, pay income tax on their share of the partnership's profits, and pay National Insurance to HMRC.
A General Partnership is set up by a group of sole traders. In a general partnership, all the business partners are self-employed. This means that every individual has to register with HMRC and complete their tax return through Self Assessment.
Advantages: Each partner pays tax on their share of the business’s profits. Disadvantages: Each partner is liable for any business losses, meaning if one partner is unable to pay, the other partners will have to cover their share of the debt. It will put the other partners’ assets at risk.
A Limited Partnership consists of at least one limited partner and at least one general partner. The general partner is usually in charge of the limited partners and the business. A limited partner’s liability is limited to their level of investment and they have nothing to do with the daily management of the partnership.
Advantages: A limited partner does not participate in the business, he/she invests capital and receives their portion of the profits.
Disadvantages: As passive investors who do not take part in the management, limited partners cannot sustain losses that are more than their annual income.
Also read: Private Company Limited by Shares | UK Company Formation
Private Limited Company
A private limited company is a privately managed business that is owned and run by its shareholders. The company is a separate legal entity with its own set of legal rights and obligations. This means that the company is accountable for everything it does, and its finances are separate from the owners’ personal affairs.
After paying Corporation Tax, the company retains any profits generated. Only then can profits be distributed to shareholders as dividends. Private limited companies can be private limited by shares or private limited by guarantee, and they have annual reporting and filing requirements with both Companies House and HMRC.
Private Limited by Shares:
Most UK companies are privately limited by shares, which means that the shareholders’ responsibilities for the company's financial liabilities are limited to the amount agreed to pay for the shares.
Private Limited by Guarantee:
A private limited by guarantee company does not have share capital or shareholders, but rather members who act as guarantors.
Also read: UK Company Formation: Limited by Guarantee (LBG)