Business structures: sole trader, partnership, or limited company

The structure you trade through affects your tax bill, your personal risk, and how much admin you carry. Here’s the honest comparison.

Sole trader

You are the business. Registration is a quick form with HMRC, you file one Self Assessment return a year, and profits are taxed as your income — in Scotland, at Scottish income tax rates — plus Class 4 National Insurance.

Upsides: simplest to run, cheapest to comply, losses in early years can often be set against other income. Downsides: unlimited personal liability — business debts are your debts — and at higher profits the tax drag usually exceeds a company’s.

Partnership

Two or more people trading together. Like sole traders, partners are taxed personally on their profit shares, and the partnership files its own return as well. A written partnership agreement isn’t legally required — but trading without one is how friendships end. (A Scottish partnership has legal personality of its own, one of several quirks north of the border.)

Limited company

The company is a separate legal person: it makes the profit, pays corporation tax (19% on small profits, 25% at the main rate), and you extract income as salary and dividends. Your liability is normally limited to what you put in.

Upsides: liability protection, often lower overall tax at healthy profit levels, more credible with some customers and lenders, flexible profit extraction and pension planning. Downsides: public filings at Companies House, stricter record-keeping, accountancy costs, and the extraction rules covered in our running a limited company guide.

So which one?

There’s no universal crossover number — it depends on how much of the profit you need to live on, whether you’ll reinvest, VAT position, and what the next three years look like. As a rough rule: modest profits you fully withdraw favour staying unincorporated; growing profits you partly retain favour a company. Our incorporation guide covers the switch itself.

Ask us before you commit. Structure is much easier to get right at the start than to unwind later — it’s one of the first things we cover in a free consultation.