There are basically four ways to trade:

  • as a sole trader;
  • as a limited company;
  • as a partnership (if you are setting up a business with at least one other person); or
  • a limited liability partnership.

The key characteristics are outlined below and on our calculators and toolkits page there is a tax calculator that will calculate the amount of tax you will pay.

Sole trader

Operating as a sole trader is the simplest way to start a business.  You have to notify HM Revenue and Customs once you start trade as that’s it.  The big disadvantage is that you are personally liable for the business debts which means you could lose everything if the business fails.

Sole traders pay income tax on their trading profits, class 2 and class 4 national insurance.  If you take on employees you will pay class 1 national insurance on their earnings .  If your turnover exceeds the VAT threshold and you make taxable supplies you will need to register for VAT.

Limited company

The big advantage of trading through a limited company is that you are not personally liable for the business debts.  The disadvantage of operating through a company is the extra paperwork that is required to comply with UK company law.
Limited companies pay corporation tax on trading profits and will need to register for VAT if turnover exceeds the VAT threshold and the supplies are taxable .   The only way to take money out of a limited company is by a salary, loan or as dividends.  If you employ yourself and others the company will pay class 1 national insurance on their (and your) earnings.

Be careful about taking money as a loan from the company; up to £5,000 is treated as a non-taxable benefit but more than that and tax and interest charges arise.

Dividends are paid after corporation tax to all the shareholders in proportion to their shareholding.


A partnership is similar to a sole trader business but with several people running the business together.  There is no limit on the number of partners an organisation can have but administratively it may be easier to operate out of a company when a large number of individuals are in business together.  Each partner is bound by the actions of the other partners and as with operating as a sole trader, if the business fails you may lose everything.

It is best practice to set up a partnership agreement which will detail how the profits are to be split (and other operating matters). The partnership’s profits are split in accordance with the profit sharing agreement and the partners are then taxed as sole traders.  The taxes partners and the partnership pay are the same as those outline for sole traders above.

Limited liability partnerships

Limited liability partnerships (LLPs) are a hybrid and limit the liability of the partners to business debts like a company but allow the partners to pay income tax as a partnership.
Each partner is taxed as if they were operating as a sole trader.

Why not check our tax calculator to see how much each option will cost you in tax and national insurance.