Choosing the right business structure is one of the highest-leverage decisions an SME owner makes. A sole trader at £30,000 profit pays £4,500 income tax + £1,150 Class 4 NI = £5,650 total. The same £30,000 profit through a limited company pays £5,700 corporation tax (19%) + £400 dividend tax (after £500 allowance + basic-rate band) = £6,100. At low profit levels, sole trader wins on simplicity. At higher profit levels, the limited company wins on extraction efficiency, dividend timing, pension contribution flexibility and limited liability. Partnerships and LLPs sit between these, with their own profile.
Sole trader vs limited company: 2026 cost-benefit
Sole trader vs Ltd 2026: tax + compliance comparison
| Profit level | Sole trader total tax + NI | Ltd corp tax + dividend extraction | Annual compliance cost |
|---|---|---|---|
| £25,000 | £3,985 | £4,750 + ~£0 | ST £400 / Ltd £900 |
| £50,000 | £11,432 | £9,500 + ~£500 | ST £500 / Ltd £1,200 |
| £75,000 | £20,432 | £14,250 + £1,975 | ST £600 / Ltd £1,400 |
| £100,000 | £29,432 | £19,000 + £4,250 | ST £700 / Ltd £1,600 |
Above £40,000-£50,000 of profit, the limited company structure typically pays back its compliance overhead within 1-2 years for SMEs intending to retain or grow. Below that level, sole trader is usually right unless limited liability is critical (consumer-facing businesses with personal injury exposure, professional services with substantial PI risk).
Setting up a partnership
A general partnership exists by default once two or more people trade together. To make it work in practice:
- 1Written partnership agreement: profit shares, decision-making, capital contributions, exit terms.
- 2Notify HMRC: register the partnership for Self-Assessment, get a partnership UTR.
- 3Each partner registers individually for Self-Assessment.
- 4Annual SA800 partnership return + individual SA100 returns for each partner.
- 5Open a partnership bank account (most banks require all partners as signatories).
A partnership without a written agreement defaults to Partnership Act 1890
The default rules: equal profit share, equal decision rights, dissolution on any partner's death or insolvency. For most partnerships these defaults do not match commercial intent. A bespoke agreement costs £800-£2,500 and prevents existential disputes.
Sole trader to limited company: Incorporation Relief
Section 162 Incorporation Relief defers the CGT charge on transfer of a business to a limited company:
- Available where all assets of the business (other than cash) transfer to the company.
- Consideration in shares of the company.
- CGT base cost of the business carries forward into share base cost.
- Latent gain becomes payable on eventual share disposal.
- Most relevant for businesses with significant goodwill or appreciated assets.
Director statutory duties under Companies Act 2006
UK directors carry seven statutory duties under the Companies Act 2006:
- 1Act within powers (s171).
- 2Promote the success of the company (s172).
- 3Exercise independent judgement (s173).
- 4Exercise reasonable care, skill and diligence (s174).
- 5Avoid conflicts of interest (s175).
- 6Not accept benefits from third parties (s176).
- 7Declare interest in proposed transactions (s177).
Breach of these duties can attract personal liability, disqualification, and (in extreme cases) criminal prosecution. For most SME directors, the practical interpretation: keep proper records, do not commingle company and personal assets, declare conflicts before they bite.
Limited liability: what it actually protects
Limited liability separates the company's debts from the director-shareholder's personal assets:
- Company debts: payable from company assets only.
- Director-shareholder personal assets: protected from creditor claims (with exceptions).
- Exception 1: Personal guarantees on bank loans, leases, supplier accounts pierce limited liability for those specific debts.
- Exception 2: Director loan account overdrawn at insolvency: liquidator can pursue the director personally.
- Exception 3: Wrongful trading: continuing to trade when insolvency is inevitable can attract personal liability.
- Exception 4: Director's personal acts (fraud, negligence) outside corporate role.
The Business Structure Series
We're publishing two detailed pieces per week from this series. Check back shortly.
Business structure and funding access
Different structures attract different funding profiles:
- Sole trader: bank loans require personal guarantee anyway; structure does not gate access.
- Limited company: easier access to invoice finance, asset finance, alternative lenders. Crucial for VC/angel investment (only Ltd companies can issue shares).
- EIS/SEIS investment: only available to limited companies meeting qualifying conditions.
- Government start-up loans (£500-£25,000): available to sole traders and Ltds equally.
- Larger commercial bank facilities (£100k+): typically Ltd-only.
Winding down a solvent company
When a solvent limited company is no longer needed, two main routes:
Strike off vs Members' Voluntary Liquidation
| Aspect | Strike off (DS01) | Members' Voluntary Liquidation (MVL) |
|---|---|---|
| Cost | £10 + accountant fee £300-£600 | £3,500-£8,000 incl liquidator |
| Time | 3 months | 6-12 months |
| Distributable reserves | Up to £25k tax-free | Above £25k, BADR at 10% if qualifying |
| Outstanding contracts | Must be settled first | Liquidator handles |
| Best for | Small reserves, simple closure | Reserves above £25k, BADR-qualifying owners |
Choosing the right business structure for your Harrow SME?
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