This article looks at four basic business structures - sole trader, partnership, limited liability partnership and limited company. In 90 seconds or less.
As a sole trader, you are self employed and profits from your business appear on your personal self assessment tax return (on which you pay income tax). Despite being called a sole trader, you may employ people. You are personally responsible for all debts arising from your business.
In a partnership, you share responsibility for the business with you partner(s). You pay income tax on your share of the partnership's profits through your self assessment tax return. Critically, you are personally liable for the full amount of any liabilities of the partnership even if the liability was incurred by another partner.
A Limited Liability Partneship (LLP) is like an ordinary partnership but the partners are not personally liable for the debts the partnership can't pay.
In a Limited Company, shares are issued and its finances are separate to yours: you have no personal liability above and beyond your initial investment. A limited company is an entity in law and must file accounts with Companies House. You might be paid a salary by the company if you are also an employee. A company's profits are subject to Corporation Tax. Profits after tax can be paid out to shareholders via dividends.
A limited company is these days the most common corporate structure. But because you have no personal liability to the debts of the company, it carries the highest obligation in terms of public reporting requirements. As an owner of a private company, it is often best to hire a firm of accountants to help you with those obligations.