Understanding UK Entities: Basic Guide

Sole Trader

Partnership

Limited Liability Partnership

Limited Liability Company

Meaning

A sole trader is a single/sole person who runs his/ her own business or is self-employed.

A partnership firm is a business entity where two or more legal persons come together to manage and operate a business.

Here “legal person” can be any person like a limited company (not mandatorily an Individual) who can act as a partner in the partnership firm.

Limited Liability partnership is similar to that of a partnership except that the LLP has its distinct identity from its partners and the liability of members i.e. the partners is limited to extent of capital contributed by them.

A Limited Liability Company is a Company limited by shares or guarantee and having its distinct identity. Company can be a Private Company or a Public Company. Further, the shares of Public Company can be listed on a Stock Exchange and such Company is called a Quoted Company.

Name of the Business

A sole trader can name the business after his/her own name or such other name as desired.

Sole trader business name:

• shall not include words ‘limited’, ‘Ltd’, ‘limited liability partnership, ‘LLP’, ‘public limited company’ or ‘plc’ in its name;
• shall not be offensive;
• shall not be same as an existing trade mark.

A partnership firm can name the business after partners’ name(s) or such other name as desired by the partners.

Name of the partnership:

• shall not include words ‘limited’, ‘Ltd’, ‘limited liability partnership, ‘LLP’, ‘public limited company’ or ‘plc’ in its name;
• shall not be offensive;
• shall not be same as an existing trade mark.

The name of the Limited partnership must have the words “Limited Liability Partnership” or “LLP” at the end of the name

Name of the LLP:

• shall not include ‘limited’, ‘Ltd’, ‘public limited company’ or ‘plc’ in its name;
• shall not be offensive or include any sensitive words/ expressions;
• shall not be same as an existing trade mark.

The Name of the Company shall include the words ‘limited’, ‘Ltd’, ‘limited, ‘public limited company’ or ‘plc’ in its name depending on the type of company i.e. Private Company or Public Company .

Name of the Company:

• shall not be offensive;
• shall not be same as an existing trade mark;
• shall not be offensive or include any sensitive words/ expressions;

Registration

• A sole trader shall register for Self-Assessment on the HMRC portal when he/ she earns £1,000 in a tax year (6^th April to 5^th April) by the following 5^th October.
• A sole trader need not register with the Companies House.

The partnership shall be mandatorily registered with the HMRC and partnership shall appoint a nominated partner who shall be responsible for managing the partnership’s tax returns and record keeping.  The partners themselves are also required to register for Self-Assessment on the HMRC portal.

The LLP needs to be registered with the Companies House, and the HMRC for filing of tax returns and annual accounts.

Company needs to be registered with the Companies House, and the HMRC for filing of tax returns and annual accounts.

Minimum Founders (Shareholders/ Partners)

Only One. Non-UK residents can also set-up a sole trader business in the UK.

Two or more.

Minimum 2 (Two) Designated members and any number of ordinary members

Private Company: at least one Director (natural person) and one shareholder

Public Company: at least two Directors (natural person) and one shareholder

Share Capital

No minimum share capital requirement. Sole trader can infuse own funds as and when required for the business.

No minimum share capital or capital contribution requirement. Though partners need to bring in capital contribution or assets as decided in the partnership agreement for running the business.

No minimum share capital or capital contribution requirement. Though partners need to bring in capital contribution or assets as decided in the LLP agreement for running the business.

Private Company: No minimum share capital, at least one share must be subscribed on incorporation.

Public Company: Minimum authorised share capital is £50,000, of which at least 25% must be paid-up.

Registered Office address

As the sole Trader is not required to register himself on the Companies House, there are no such specific requirements pertaining to registered office address.

As the partnership is not required to register himself on the Companies House, there are no such specific requirements pertaining to registered office address.

Registered office must be an appropriate place i.e. shall have a physical office in the UK and should be in same jurisdiction where the LLP is registered/ incorporated.

Registered office must be an appropriate place i.e. shall have a physical office in the UK and should be in same jurisdiction where the LLP is registered/ incorporated.

Management/ Responsibilities

Sole Trader is responsible for running the business on his/ her own, and therefore the sole trader shall have unlimited liability.

• Partners are individually responsible for running the business and liable for all the liabilities and shall bear full legal responsibility for business debts and risks.
• A Nominated Partner is responsible for the registration with the HMRC, tax return filing and payments.

Designated members/ partners are responsible for registering the LLP and the partners individually with the HMRC for Self-Assessment, appoint auditor if needed, keep accounting records, prepare, sign and submit annual accounts to the Companies House, sending Confirmation Statement to the Companies House, etc.

• Apart from having minimum number of Directors (as stated above), the Public Company must have a Company Secretary. Private Company is not required to appoint a Company Secretary.
• Audit is applicable except to Small Companies, Dormant Companies.

Charter documents

There is no such charter document for a sole trader.

A partnership Agreement shall outline all the liabilities, ownership, profit sharing, decision making, new partner admission, partner exit formalities, and such other important aspects of partnership as mutually discussed between the partners.

A LLP Agreement shall outline all the liabilities, ownership, profit sharing, decision making, new partner admission, partner exit formalities, and such other important aspects of partnership as mutually discussed between the partners.

A Company must have a ‘Memorandum of Association” and ‘Articles of Association” documents in place at the time of Incorporation. These are the Charter documents of a Limited Company

Yearly Statutory Obligations

• If a sole trader earns more than £1,000 from his self-employment business in a year, he must mandatorily register himself with the Self-Assessment portal and pay National Insurance as per the limits prescribed.
• File tax return with the HMRC.

• Nominated partner of the partnership shall be responsible for mandatory registration with HMRC for Self-Assessment and pay National Insurance as per the limits prescribed.
• Such nominated partner shall sign and submit tax returns on behalf of the partnership every year

• Designated members/ partners of the LLP shall be responsible for mandatory registration with HMRC for Self-Assessment and pay National Insurance as per the limits prescribed.
• Such designated partner shall sign and submit tax returns on behalf of the LLP every year.
• File Confirmation Statement and annual accounts with the Companies House.

Confirmation statement:

• Filing the Confirmation Statement is mandatory even if there are no changes during the review period
• The due date for filing the Confirmation Statement is within 14 days from the end of the 12 months (review period). The 12 months review period starts either on:

-the date of incorporation of the company (for first year);

-the date of filing last Confirmation Statement

Annual Accounts: A company must properly maintain its books of accounts for the transactions done during the financial year and send annual accounts to the Companies House within 21 months from the date of incorporation for the first year and within 9 months from the end of the financial year from second year onwards.

Corporate Tax Return: Company must file tax return with the HMRC within 12 months from the end of the annual accounting period.

Income Taxes

A tax free personal allowance of £12,570 is allowed for the current tax year 2024/25. In addition to personal allowance, one can claim marriage allowance or blind person’s allowance, if eligible for it.

If the taxable income is:

£12,571 - £50,270 - tax @20%

£50,271 - £125,140 - tax @40%

Above £125,140 - tax @45%

Personal allowance is not available if taxable income is above £125,140.

(In case of non-UK residents, tax shall be payable in the UK only on the income arising from the UK.)

A partnership is not separately taxed as such but all the partners are individually taxed as per their share of profits. The tax rates applicable for partners are same as that for sole trader (self-employed).

(In case of non-UK residents, tax shall be payable in the UK only on the income arising from the UK.)

Similar to a partnership, a LLP is not separately taxed as such but all the partners are individually taxed as per their share of profits. The tax rates applicable for partners are same as that for sole trader (self-employed).

(In case of non-UK residents, tax shall be payable in the UK only on the income arising from the UK.)

• Tax rate for companies having small profit of less than £50,000 is 19%
• Tax rate for companies with profit from £50,001 to £250,000 is 25%, (these companies have option to avail marginal relief scheme)
• Tax rate for companies having profit of more than £250,000 is 25%

Sales Tax (VAT)

If the total VAT taxable turnover:

• for the last 12 months (any straight 12 months and not necessarily tax year/ financial year) exceeds £90,000; or
• if turnover is expected to go over £90,000 in the next 30 days, it is mandatory for the sole trader to register for VAT. One can also opt for voluntary registration if the business demands so.

The standard rate of VAT is 20%.

Financial Year

Financial year followed in the UK is from 6^th April to 5^th April

First financial year of the LLP shall start from its incorporation date (which is more than 6 months but less than 18 months) and end on the last date of the month in which anniversary of its incorporation falls.

Subsequent financial years shall begin on the day immediately following the end of previous financial year and end on the last date of its anniversary of incorporation.

First financial year of the company shall start from its incorporation date (which is more than 6 months but less than 18 months) and end on the last date of the month in which anniversary of its incorporation falls.

Subsequent financial years shall begin on the day immediately following the end of previous financial year and end on the last date of its anniversary of incorporation.