Understand how your business structure shapes tax, liability and funding opportunities – and make the right choice to set your venture up for long-term success
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When launching a new business, there’s lots of exciting stuff you probably can’t wait to get stuck into: designing your logo, building a website and finding your first customers, for instance. Deciding on your business legal structure might not get you inspired in the same way, but it’s one of the most important decisions you’ll make in those early days.
Your legal structure influences how you pay tax, how profits are shared, who’s liable if something goes wrong, and crucially, how attractive your business is to future investors.
Getting your legal structure right from the start can make or break your ability to scale, whether you're bootstrapping a solo consultancy or laying the groundwork for a fast-growth startup.
In this article, we’ll tell you what types of legal business structures are available to you in the UK and what each one is suited to. We’ll also weigh up the benefits and pitfalls of all the options.
Your legal structure determines how you’re treated by HMRC, how profits are shared, and what kind of paperwork you’ll be dealing with. It can also have a big impact on your ability to raise funds or get a loan further down the road.
It’s the legal shape your business takes – whether that’s a sole trader, a limited company, or something else. Your legal structure defines how your business is taxed, who is liable for debts, how profits are distributed, and how the business is legally recognised. It can also affect your ability to raise investment or bring on co-founders.
There are several legal business structures that UK entrepreneurs can pick from. Each one has different pros and cons, depending on your goals, how you want to run things, and your attitude to risk.
This is the simplest option. It’s quick and easy to set up, and you’re in full control. However, you and your business are legally the same, so if the business goes into debt, your personal assets could be at risk.
With this legal business structure, your company is a separate legal entity. That means your personal assets are protected (as long as you act responsibly). It also may offer more credibility to customers and lenders, though there’s more admin involved, and you’ll need to file accounts with Companies House.
In a standard partnership, you and your partner(s) share control, profits, and responsibilities. It’s fairly straightforward to set up, but you’re also jointly liable – so if one partner makes a mistake, it can affect everyone.
An LLP is a hybrid of a partnership and a company. It gives you the flexibility of a partnership but with limited liability for its members.
CICs are designed for social enterprises. They operate as limited companies, but with special rules to ensure that profits go back into the community.
Your legal structure of business affects how you’re taxed, who owns the business, and who’s responsible if things go wrong.
For example, if you’re a sole trader, you’ll pay income tax on your profits through Self Assessment. If you run a limited company, you’ll pay Corporation Tax on your company’s profits, and can draw income through dividends or salary (which might offer more tax flexibility).
In terms of liability, limited companies and LLPs provide a protective shield: You won’t normally be personally liable for company debts. On the other hand, sole traders and partnerships carry more personal risk.
Ownership can also differ. A limited company is owned by its shareholders, and profits are distributed as dividends. As a sole trader, all profits are yours – but so are all the risks.
One of the most important reasons to think carefully about your legal structure in business is funding.
Lenders often prefer working with limited companies, because they’re separate legal entities and are required to keep detailed records. This makes it easier to assess risk and make lending decisions.
Sole traders may find it harder to access business loans and may need to rely on their personal credit history. Some lenders won’t offer any sole traders funding.
It affects your eligibility, the paperwork you’ll need to provide, and how your business is assessed. For example, at iwoca, we only offer small business loans to limited companies, not sole traders. This is partly due to the legal clarity and financial transparency that comes with this structure.
The legal structure you choose depends on your goals, how you want to work, and your appetite for risk (and paperwork).
If you want to keep things simple, and your business is small and low-risk, starting as a sole trader makes sense. But if you’re planning to grow, hire staff, or attract investors, a limited company is usually a better fit. It offers more credibility and can also be more tax-efficient as your income grows.
Partnerships can work well when two or more people want to run a business together, especially if they bring different skills or responsibilities. LLPs are a useful step up if you want that flexibility without the personal risk.
Your legal structure might need to change as your business grows and evolves.
You might start as a sole trader and then decide to switch to a limited company to reduce personal liability, optimise your tax position, or because a lender requires it. This is fairly common, and it’s possible to make the switch by registering a company with Companies House.
Keep in mind, there may be tax and legal consequences to switching mid-year. It’s a good idea to speak to an accountant to help you plan the transition.
Yes, many business owners do this as they grow. For example, you might start as a sole trader and later register as a limited company to access tax benefits or attract investors. You'd need to register the new structure with Companies House, inform HMRC, and transfer any assets, contracts, or bank accounts to the new entity.
It’s important to include a section on your legal structure when you put together a business plan. This helps potential lenders or investors understand how your business is set up, who’s in charge, and what kind of risks are involved.
Including your legal structure in your business plan shows that you’ve thought through how your business will operate. It also helps explain why your chosen structure supports your goals – whether that’s low overheads, shared responsibilities, or being able to scale quickly.
If you're applying for funding, lenders will want to see a structure that offers transparency and accountability, which are more common in limited companies.
The best way is to weigh up your goals, your appetite for risk, and how much admin you’re prepared to deal with.
Regardless of your choice, it’s a good idea to speak to an accountant or business adviser before making a final decision. They can help you understand the tax implications and what will work best for your long-term plans.
If you’re running a limited company and need access to fast, flexible funding, iwoca’s Flexi-Loan could be a great option.
Our loans are designed to be simple, fast, and tailored to small businesses. There are no early repayment fees, so you can repay when it suits you, and you only pay interest on what you actually use.
Need funding for your limited company? Take a closer look at iwoca’s Flexi-Loan. It takes minutes to apply, and we typically approve applications in 24 hours or less. Apply today.
