Starting a UK Business in 2026: Sole Trader, Ltd or LLP?

Sole trader: simple but unprotected

Operating as a sole trader means you and the business are legally the same person. You register with HMRC for self assessment, file a tax return each year and pay income tax and Class 2 and Class 4 National Insurance on your profits. There is no Companies House filing and no separate accounts requirement.

The downside is unlimited personal liability. Business debts, contractual disputes and uninsured losses come straight from your personal assets. For low-risk consultancy or service businesses with modest turnover, this is often acceptable. For anything where a client could plausibly sue, employees may be hired or significant credit is taken on, the protection of a limited company is usually worth the extra admin.

Limited company: protection plus complexity

A private limited company is a separate legal person. You and your fellow shareholders own it; directors run it. Your liability is generally limited to the amount unpaid on your shares. You file annual accounts and a confirmation statement at Companies House, and pay corporation tax on profits.

Tax planning typically combines a small salary up to the National Insurance secondary threshold with dividends to extract profit. The rates and allowances change frequently — particularly the dividend allowance and corporation tax bands — so review your remuneration plan annually with an accountant. Directors also have legal duties under the Companies Act 2006, including keeping proper records and acting in the company's best interests.

LLP: partnership with limited liability

Limited Liability Partnerships sit between sole trader and limited company. They provide limited liability to members, file accounts at Companies House, but are taxed transparently — each member pays income tax on their share of profits. They are most commonly used by professional services firms such as solicitors, accountants and consultancies with multiple owners.

An LLP is rarely the right choice for a single founder or a tech startup expecting to raise venture capital. Investors typically want shares in a limited company, not membership interests in an LLP. If you are forming a partnership of equals in a service business, an LLP can be a clean structure with the right Members' Agreement.

VAT, banking and insurance

VAT registration becomes mandatory once your taxable turnover exceeds the registration threshold on a rolling 12-month basis, currently £90,000. Voluntary registration below that threshold can be useful where most clients are themselves VAT-registered, but it adds quarterly admin and Making Tax Digital obligations.

Open a dedicated business bank account from day one — for limited companies it is effectively required. Specialist neobanks such as Tide, Starling Business and Revolut Business often onboard within a day. Insurance to consider includes professional indemnity, public liability, employers' liability where you have staff and cyber cover for any business handling personal data.

Realistic startup costs

Many founders underestimate the soft costs of getting going. Companies House incorporation is just £50, but a solid set of articles, shareholders' agreement, contract templates and privacy policy from a small-business solicitor will run into a few hundred pounds. Branding and a basic website range from a few hundred to several thousand depending on ambition.

Build a 12-month cashflow forecast covering software subscriptions, accountancy, marketing, insurance, salaries and a contingency line of at least 10 percent. Track actual spend against forecast monthly. The single most common reason early-stage UK businesses fail is not bad ideas — it is running out of cash before the model matures.

Frequently asked questions