Sole Trader vs Partnership vs Limited Company

Choosing the right business structure is a crucial decision for entrepreneurs and business owners in the UK. Whether you’re starting out or considering a change, understanding the differences between sole trader, partnership, and limited company setups can help you make an informed choice. Below is a comparison covering setup, operations, compliance, and taxation.

1. Setup Requirements

Structure	Setup Process	Cost & Time
Sole Trader	Register with HMRC for Self Assessment. No need to register with Companies House.	Free, quick
Partnership	Register with HMRC. Create a partnership agreement (recommended).	Low cost, simple
Limited Company	Register with Companies House. Choose company name, appoint directors, issue shares.	Moderate cost, more formal

2. How It’s Run

Structure	Ownership & Control	Decision-Making
Sole Trader	One person owns and controls everything.	Full control by the owner.
Partnership	Two or more people share ownership.	Decisions shared; governed by agreement.
Limited Company	Owned by shareholders, run by directors.	Directors manage; shareholders influence major decisions.

3. Compliance Obligations

Structure	Reporting & Legal Duties	Public Disclosure
Sole Trader	Submit annual Self Assessment tax return. Keep financial records.	Private
Partnership	Each partner submits Self Assessment. Nominated partner handles partnership tax return.	Private
Limited Company	File annual accounts, confirmation statement, and Corporation Tax return. Maintain statutory registers.	Public (via Companies House)

4. Taxation

Structure	Tax Type & Rates	Tax Efficiency Potential
Sole Trader	Income Tax (20%/40%/45%) + National Insurance (Class 2 & 4).	Less efficient at higher profits.
Partnership	Same as sole trader, but split among partners.	Similar to sole trader.
Limited Company	Corporation Tax (19%–25%) on profits. Directors pay Income Tax on salary; dividends taxed separately.	More efficient at higher profits.

Example:

A sole trader earning £50,000 pays Income Tax and NI on the full amount.
A limited company earning £50,000 pays Corporation Tax, and the owner can split income between salary and dividends to reduce tax.

Summary: Pros & Cons

Structure	Pros	Cons
Sole Trader	Easy to set up, full control, minimal admin.	Unlimited liability, less tax-efficient, lower credibility.
Partnership	Shared responsibility, simple setup.	Joint liability, potential for disputes.
Limited Company	Limited liability, tax planning options, professional image.	More admin, director responsibilities, public filings.

Detailed Tax Breakdown for 2025/26

1. Sole Trader Taxation

Income Tax: 20%/40%/45% depending on income bands.
NICs: Class 2 (voluntary under £6,725), Class 4 (6% up to £50,270, 2% above).
Reporting: Register with HMRC, submit Self Assessment.
Tip: Use £1,000 trading allowance, offset losses.

2. Partnership Taxation

Each partner pays Income Tax and NICs on their share.
Partnership files SA800; partners file SA100.
Tip: Use partnership agreement; sideways loss relief may apply.

3. Limited Company Taxation

Corporation Tax: 19% up to £50k, 25% over £250k, marginal relief in between.
Dividend Tax: First £1,000 tax-free, then 8.75%/33.75%/39.35%.
Employer NICs: 15% on salaries above £5,000.
VAT: Register if turnover exceeds £90,000.
Reporting: CT600, accounts, confirmation statement, Self Assessment.
Tip: Use low salary + dividends, claim R&D credits.

Summary Comparison

Tax Type	Sole Trader	Partnership	Limited Company
Income Tax	On total profits	On share of profits	Only on salary/dividends
Corporation Tax	❌	❌	19–25% on profits
NICs	Class 2 & 4	Class 2 & 4 per partner	Employer + Employee NICs
VAT	If turnover > £90k	If turnover > £90k	If turnover > £90k
Reporting	Self Assessment	SA800 + SA100	CT600 + accounts + SA
Tax Efficiency	Low at high profits	Moderate	High with planning

Need help deciding which structure is right for you?
Explore our accountancy and tax services or contact us today for tailored advice.

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