You must choose a structure for your business. This structure will define your legal responsibilities, like:

• the paperwork you must fill in to get started
• the taxes you’ll have to manage and pay
• how you can personally take the profit your business makes
• your personal responsibilities if your business makes a loss

You can change your business structure after you’ve started up if you find a new structure suits you better.

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Types of business

The main types are:

• sole trader
• limited company
• business partnership

You can form an ‘unincorporated association’ if you’re setting up a small organisation like a sports club or a voluntary group and don’t plan to make a profit.

You can use other structures for businesses that help people or communities, eg ‘social enterprises’.

 Sole trader

If you start working for yourself, you’re classed as a self-employed sole trader– even if you’ve not yet told HM Revenue and Customs (HMRC).

As a sole trader, you run your own business as an individual. You can keep all your business’s profits after you’ve paid tax on them.

You can employ staff. ‘Sole trader’ means you’re responsible for the business, not that you have to work alone.

You’re personally responsible for any losses your business makes.

Find out how to set up as sole trader.

Tax responsibilities

You must:

• send a Self Assessment tax return every year
• pay Income Tax on the profits your business makes
• pay National Insurance

You must also register for VAT if you expect your takings to be more than £85,000 a year.

Limited company

A limited company is an organisation that you can set up to run your business – it’s responsible in its own right for everything it does and its finances are separate to your personal finances.

Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits.

Ownership

Every limited company has ‘members’ – the people or organisations who own shares in the company.

Directors are responsible for running the company. Directors often own shares, but they don’t have to.

Legal responsibilities

There are many legal responsibilities involved with being a director and running a limited company.

Types of company

Limited by shares

Most limited companies are ‘limited by shares’. This means that the shareholders’ responsibilities for the company’s financial liabilities are limited to the value of shares that they own but haven’t paid for.

Company directors aren’t personally responsible for debts the business can’t pay if it goes wrong, as long as they haven’t broken the law.

Private company limited by guarantee

Directors or shareholders financially back the organisation up to a specific amount if things go wrong.

Public limited company

The company’s shares are traded publicly on a market, such as the London Stock Exchange.

You can also consider setting up a private unlimited company as an alternative legal structure. Directors or shareholders are liable for all debts if things go wrong.

How to set up a limited company

You must register the company with Companies House and let HM Revenue and Customs (HMRC) know when the company starts business activities.

Read more about setting up a private limited company.

Tax responsibilities

Every financial year, the company must:

• put together statutory accounts
• send Companies House an annual return
• send HMRC a Company Tax Return

The company must register for VAT if you expect its takings to be more than £85,000 a year.

If you’re a director of a limited company, you must:

• fill in a Self Assessment tax return every year
• pay tax and National Insurance through the PAYE system if the company pays you a salary

 Ordinary’ business partnership

In a business partnership, you and your business partner (or partners) personally share responsibility for your business.

You can share all your business’s profits between the partners. Each partner pays tax on their share of the profits.

Partnerships in Scotland (known as ‘firms’) are different, and have a ‘legal personality’ separate from the individual partners.

Legal responsibilities

You’re personally responsible for your share of:

• any losses your business makes
• bills for things you buy for your business, like stock or equipment

You can set up a limited partnership or limited liability partnership if you don’t want to be personally responsible for a business’ losses.

A partner doesn’t have to be an actual person. For example, a limited company counts as a ‘legal person’, and can also be a partner in a partnership.

You must choose a name for your partnership and register it with HM Revenue and Customs (HMRC).

Tax responsibilities

The nominated partner must send a partnership Self Assessment tax return every year.

All the partners must:

• send a personal Self Assessment tax return every year
• pay Income Tax on their share of the partnership’s profits
• pay National Insurance

The partnership will also have to register for VAT if you expect its takings to be more than £85,000 a year.

Use a formation agent to register your company

This government guide contains information on what services agents offer and a list of agents authorised to incorporate companies electronically with Companies House.