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Setting up a business requires the consideration of many aspects, including the choice of business structure. This decision is one of the most important, as it determines a host of other vital issues for the business. For many, choosing a ‘corporate form can seem complicated, and some can overthink it. However, there are established corporations that once started as sole proprietorships, while some start-ups have spent precious resources on establishing complex legal structures.  

The choice of business structure has many implications, including the level of the owner’s liability to the business. As such, it is vital to choose wisely and even seek professional advice where necessary. Paul Smith, Touchstone Education co-founder, has put together a team of investment experts that teach students how to effectively set up their businesses to avoid any financial or legal issues that poor structures can bring about. 

To get a better idea of the type of structure that suits an entrepreneurs needs, it is vital to understand the common structures and their main features.  

Sole Trader 

As the name suggests, the sole trader (or proprietor) is chiefly responsible for running the business and meeting its legal requirements. The individual is considered to be self-employed, meaning they have to register for self-assessment with HM Revenue & Customs (HMRC) as soon as trading commences. Sole traders can keep what is left after paying taxes but are also personally liable for any debts the business incurs. 

Setting up a sole proprietorship is a lowcost affair, while the legal requirements are not as complex as other structures. This business structure suits entrepreneurs who want to retain full control and do not mind being fully liable for any debts. 


A partnership builds on the sole proprietorship structure by allowing two or more individuals to come together as co-owners of a business. In doing so, the partnership members share responsibility for contributing capital and for running the business. This type of structure suits people who may have an experienced partner whose knowledge or expertise would be useful to the company. Regardless, the structure ensures that profits are distributed according to each partners shares in the company, which is among the aspects captured in a partnership agreement.  

When setting up a partnership, the business has to register with HMRC, have a name, and provide a nominated partner whose responsibility it is to keep records and manage tax filing. The partnership agreement will include the entitys liabilities, ownership, and how to handle the departure of a partner. Similar to sole traders, each partner must register as self-employed and file tax returns separately.  

In standard (or general) partnerships, all members play an active role in the companys daily operations, while also assuming responsibility for obligations and debts according to their shares in the company. In a limited partnership agreement, general partners will actively participate in the business, while passive partners serve only as investors by contributing a certain amount of capital. 

Limited Liability Company 

A limited liability company must be incorporated with Companies House, where information such as the companys name, registered address, directors, shareholders, and articles of association are submitted. The companys directors run the business on behalf of the shareholders, and in many cases, they tend to be shareholders too. 

A companys shareholders have limited liability in the entity so that their personal assets are protected in case the business becomes insolvent. Whatever loss the shareholders incur is based on the money invested and not their assets. Businesses structured as limited liabilities enjoy relatively lower tax rates than the income tax levied on sole traders. They also tend to be held in higher regard than other structures, and players within some sectors only work with incorporated companies.  

However, from an administrative perspective, running a limited liability company is far more complex and time-consuming. All transactions have to be accounted for, and official records need to be maintained for decisions taken and minutes of meetings.