Choosing a Business Structure

Key facts

Sole traders pay Income Tax (20%–45%) and Class 2/4 NI on all profits.
Limited companies pay Corporation Tax at 19%–25%, plus dividend tax on extraction.
The break-even point where a limited company becomes more tax-efficient is typically around £30,000–£50,000 profit.
Limited companies offer limited liability but have more compliance obligations.
You can change structure later — many businesses start as sole traders and incorporate when profits grow.

Why Structure Matters

Your business structure determines how you are taxed, your personal liability, your reporting obligations, and how you can extract profits. Choosing the right structure from the outset — or knowing when to change — is one of the most impactful tax planning decisions you can make.^[1]

Tax Comparison Table (2026/27)

Feature	Sole Trader	Partnership / LLP	Limited Company
Tax on profits	Income Tax (20%–45%)	Income Tax (each partner)	Corporation Tax (19%–25%)
National Insurance	Class 2 + Class 4	Class 2 + Class 4 (each partner)	Employer NI on salary only
Profit extraction	Automatic (all profits are yours)	Automatic (per profit share)	Via salary, dividends, pension, rent
Personal liability	Unlimited	Unlimited (partnership) / Limited (LLP)	Limited to share capital
Compliance	Self Assessment return	Partnership return + individual returns	CT600, annual accounts, confirmation statement
Public filing	None	None (partnership) / Accounts (LLP)	Accounts filed at Companies House

Sole Trader

The simplest structure. You are the business and pay tax on all profits through Self Assessment.^[3]

Tax on £50,000 profit (2026/27, no other income):

Tax	Amount
Income Tax (£37,430 at 20%)	£7,486
Class 4 NI (6% on £37,700 + 2% on £160)	£2,265
Class 2 NI (treated as paid above the Small Profits Threshold)	£0
Total tax	£9,751
Take-home	£40,249

Limited Company

A separate legal entity. The company pays Corporation Tax on profits, and you pay personal tax on what you extract.^[2]

Tax on £50,000 profit with £12,570 salary + dividends:

Tax	Amount
Employer NI (15% on £7,570)	£1,136
Corporation Tax (19% on £36,294)	£6,896
Income Tax on salary	£0 (within personal allowance)
Dividend tax (10.75% on £28,898 after £500 allowance)	£3,107
Total tax	£11,139
Take-home	£38,861

Key insight: At £50,000, the sole trader and company are comparable. The company becomes significantly more tax-efficient at higher profit levels, especially if you can leave profits in the company (paying only 19%–25% CT instead of 40%+ Income Tax) or extract via employer pension contributions.

When to Consider Incorporating

Profits consistently above £30,000–£50,000
You do not need to extract all profits each year (retained profits only face CT)
You want limited liability protection
You want to make large employer pension contributions
You plan to sell the business in future (share sales can qualify for BADR at 18%)

When an LLP Makes Sense

LLPs are tax-transparent (like partnerships) but offer limited liability. They suit:^[4]

Professional firms (solicitors, accountants, consultants) with multiple partners
Situations where partners want limited liability but individual tax treatment
Businesses where profit-sharing arrangements need flexibility

Frequently Asked Questions

At what profit level should I consider incorporating?

As a general guide, if your annual profits consistently exceed £30,000–£50,000 and you do not need to extract all profits immediately, a limited company typically becomes more tax-efficient. However, this depends on your personal circumstances, other income, and how much profit you reinvest.

What is the difference between an LLP and a limited company?

An LLP (Limited Liability Partnership) provides limited liability like a company but is tax-transparent — each partner pays Income Tax and NI on their profit share. A limited company pays Corporation Tax on profits and directors pay dividend tax on extraction. LLPs suit professional partnerships; limited companies suit businesses wanting to retain profits.

Can I be a sole trader and have limited liability?

No. As a sole trader, you are personally liable for all business debts. If limited liability is important, you should operate through a limited company or LLP.

Is it expensive to set up a limited company?

Company formation costs as little as £12 (Companies House online fee). However, ongoing costs include annual accounts preparation, Corporation Tax returns, confirmation statements, and potentially higher accountancy fees. These are typically £1,000–£3,000 per year depending on complexity.

Sources

Set up a business — GOV.UK
Corporation Tax rates — GOV.UK
Income Tax rates and personal allowances — GOV.UK
Set up a limited liability partnership (LLP) — GOV.UK