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Understanding the differences between the various company structures that are available in the UK will help you choose the right structure for the work you do. The company structure you pick has an impact on your legal, liability and tax implications, so it’s important to pick the right one.
There are four main types of company structure in the UK:
- Sole traders
- Limited companies
- Limited liability partnerships
The main difference between them is the liability implications. Alongside these terms, there are some others, like self-employed and freelancer, that often get thrown into the mix.
Let’s run through what they all are in more detail.
Sole trader vs. limited company
A sole trader set-up is the most common type of self-employed business in the UK, and often the simplest way to get started. If you’re a sole trader, you're in control and decide what your business does. You are entitled to keep your profits after tax, but you’re also personally liable for any losses.
A limited company has limited liability, so if you’ve set one up and it suffers a financial loss, you might not be personally liable.
You can learn more about the advantages and disadvantages of setting up a limited company in our guide.
Partnership vs. limited company
A partnership involves two or more business partners agreeing to take joint responsibility for a company’s profits and losses and paying tax on their share of the profits.
If you run a limited company, you won’t be personally liable for its losses – there is legal financial separation between the company and the people running it.
So, those involved in a partnership are liable for its debts, but directors of a limited company are not personally liable.
Partnership vs. limited liability partnership
As mentioned above, a partnership is not a separate legal entity from its owners.
A limited liability partnership (LLP) is a sort of hybrid business structure between a partnership and a limited company. An LLP is considered a separate legal entity from its members, has limited liability and has a similar set up and regulation requirements as a limited company. But an LLP is treated as a partnership for tax purposes and members of an LLP are considered self-employed.
Difference between sole trader and self-employed set ups
The term ‘sole trader’ describes your business structure, while the term ‘self-employed’ simply means that you work for yourself and may employ people, such as other freelancers, to help you complete your work. With this in mind, you can be a self-employed sole trader.
What’s the difference between a self-employed and freelance set-up?
In legal terms, nothing! Both set-ups pay tax in the same way (by Self Assessment) and are usually regarded as sole traders.
The main difference is how they do work and the type of work they do.
Freelancers work for themselves, and are therefore self-employed, but freelancers will often work with clients, selling a chunk of their time in exchange for a service they offer, which is often a particular skill.
The term ‘freelancer’ has become synonymous with a certain type of work (short projects and multiple clients), which is why you’ll hear some people use it over calling themselves ‘self-employed.’ This is why freelancing is so popular in creative industries.
If we take an illustrator as an example, a freelance illustrator would sell their illustrating skills to businesses, who would commission the freelancer to create an illustration for their business in exchange for use of it and a fee.
A self-employed illustrator may create illustrations in their own style and sell them through their own brand or an online store and employ freelancers to help them out with things like accounting and marketing their business.
Self-employed workers and freelancers will often start out by setting up as a sole trader. This means you’ll have full responsibility for informing HMRC of your self-employed status and complete the Self Assessment process. Some freelancers may find it financially beneficial to set up as a limited company.
Getting the right cover for your structure
Each business structure, along with the industry you work in, comes with its own set of risks. Our tailored and customisable cover makes sure you only have insurance for the things you need cover for. Check out our specific pages on freelance insurance, limited company insurance, sole trader insurance and self-employed insurance for more information.
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This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.