New Business – Which Structure Should I Choose?Written on April 2, 2025 by Kirk Rice LLP
The Question:
I am thinking of a starting a new business, but I don’t know whether this should be a limited company? How do I decide on the best business structure?
Kirk Rice LLP answers:
For the most part when starting a new business there are four vehicles through which a business may be conducted in the UK: as a sole trader, by a partnership, by a limited liability partnership, or through a company (either private or public). Although it is possible for a company to be ‘unlimited’, the focus here is on the traditional limited liability company with a share capital.
Sometimes the risk involved with starting a new business in a particular trade, makes isolating that risk inside a limited liability partnership or a company an effective requirement. Otherwise, the choice of an unincorporated or incorporated business vehicle often depends on whether trading losses are expected in the early years of trade. Most businesses that develop to a considerable size find the inconveniences of a sole trader or partnership structure too constraining. Thus, if growth is anticipated, the choice is effectively between sole trader or partnership status initially, followed by transfer of the business to a company, or trading through a company from the start.
If losses are anticipated in the early years, and the proprietors have other taxable income, earliest relief for the losses is obtained through an unincorporated business. Company losses are effectively locked into the company. A new business is unlikely to have other income against which to relieve the losses in the short term. Thus, they must be carried forward for relief against trading profits when and if these materialise.
It is possible, and common, for a new business to be operated on a sole-trader basis initially with a view to transferring it to a limited company once it has developed. There are advantages and disadvantages of trading through a limited company, and it is advisable to understand the consequences of incorporating an existing business before proceeding.
If it is anticipated that the business will be profitable from the outset, and the proprietor has other income taxable at the higher rates (40% or 45%), then it may be sensible to commence the new trade within a limited company to shelter profits at the lower corporation tax rate (25% as from April 2023). The proprietor will be subject to the higher personal rates when the profits are drawn from the company, but the timing of tax exposure will be under his/her control. This enables effective tax planning to be undertaken.
If you have any questions relating to business accountancy, please get in touch via email info@kirkrice.co.uk
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Please note: This article is correct as at the publication date. The answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of relief from taxation are subject to change. The Financial Conduct Authority does not regulate tax planning.
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