Choosing your business structure is an important step to get right. It affects how you’re taxed, how much personal risk you take on, how easy it can be to raise money, and how credible your company looks. The kind of structure best suited for your business depends on the scope of your company. If you’re a freelancer, you’re probably better with a solo proprietorship than a corporation structure, for instance.
The kind of structure best suited for your business depends on the scope of your company. If you’re a freelancer, you’re probably better with a solo proprietorship than a corporation structure, for instance.
In this guide – brought to you by the experts at Rapid Formations, the UK’s leading company formation service – discover the pros and cons for five important business structures and how they work:
- Sole proprietorship – one person runs the business
- Partnership– two or more people run a business
- Limited liability company (LLC) – A formal company structure
- Corporation (C Corp) – Allows separate legal entities from the main business, e.g an overseas branch
- S corporation (S Corp) – A type of LLC used for tax purposes
This guide is brought to you by the experts at Rapid Formations. We can guide you through the early stages of business formation, from picking your structure and registering on Companies House, to setting up a UK address in London’s iconic Covent Gardens.
Sole Proprietorship
A sole proprietorship is the most straight-forward type of business structure. One person owns the business outright, so there’s no legal separation between the individual and the company.
Ever done freelancing work? Congratulations, you’re the sole proprietor of your freelancing business. If you’re a first time entrepreneur that’s just getting started in the planning stages, this is probably where you are.
In practical terms, this means all the profits flow directly to you. However this also means any loans would have to be taken out in your name instead of the businesses – which could make it hard to get credit in the future as your business grows. It also means you would be personally liable for any debts taken on by the business.
Pros
- Very quick and inexpensive to set up
- Full control over every decision
- Simplified tax obligations
- Flexible and easy to wind down
Cons
- Personal liability
- Harder to raise funding or take out loans
- Limited long-term scalability
- Less credibility compared to incorporated businesses
Best suited for
Freelancers, consultants, tradespeople, small side businesses, and early-stage entrepreneurs testing an idea with minimal financial risk.
Partnerships and Limited Partnerships (LP)
A partnership is a business owned by two or more people. They split all the profits, responsibilities, and decision-making between them. This is a great structure if you have a couple of potential business partners and an idea to run with, even if it’s just to get things off the ground.
There are different kinds of partnerships:
- General partnerships – all partners share equal responsibility for running the business.
- Limited partnerships – includes at least one general partner (who manages the business and has full personal liability)
- Limited liability partnerships (LLP) – all partners have protection for the actions or mistakes of other partners
The partnership best suited to you will depend on how your company is run and your risk profile.
Pros
- Shared resources and skills
- More capacity to raise capital
- Flexible arrangements for roles and responsibilities
- Built-in support from fellow founders
Cons
- Potential for disagreements
- Shared liability in many partnership types
- More complex financial and tax arrangements
- Exiting or restructuring can be complicated
Best suited for
Businesses launched by co-founders with complementary skill sets – such as small agencies, professional services, or collaborative ventures like restaurants.
Limited Liability Company (LLC)
An LLC is a hybrid structure that combines elements of small partnerships and big corporations. It offers liability protection for its owners (known as members) while allowing flexibility in taxation and internal management.
Pros
- Strong personal liability protection
- Flexible tax treatment options
- Fewer formal requirements than a corporation
- Enhanced credibility
- Flexible ownership structures
Cons
- Higher cost and more compliance than basic structures
- Rules vary by jurisdiction
- Can be less appealing to investors
- Potential tax complexity depending on classification
Best suited for
Growing small and medium-sized businesses (SMEs) seeking liability protection but with less admin than running a corporation. Early-stage startups often benefit from this structure. For example, if somebody you’re partnered with or hire breaks the law, this avoids you being held liable for their actions.
Corporation (C Corp)
A C corporation is a fully separate legal entity from its owners. It has a formal governance structure, including shareholders, directors and officers. It can also issue and sell equity in the company to raise investments.
Pros
- Strong liability protection for shareholders
- Excellent for raising investment
- Perpetual existence regardless of ownership changes
- Strong professional and commercial credibility
Cons
- Subject to double taxation
- Significant administrative and regulatory requirements
- Higher operating costs
- Less flexibility than an LLC or partnership
Best suited for
Businesses with high-growth ambitions, especially those planning to raise venture capital, scale aggressively, or pursue a future public listing.
S Corporation (S Corp)
An S corporation is a tax status that certain corporations or LLCs can elect. It allows profits and losses to pass through to owners’ personal tax returns, avoiding the double taxation applied to C corporations.
Pros
- Pass-through taxation
- Liability protection for owners
- Potential tax efficiencies through salary and dividend structuring
- Attractive to small, profitable owner-operated businesses
Cons
- Strict eligibility criteria
- Ongoing compliance requirements
- Greater scrutiny regarding owner compensation
- Restricted suitability for businesses seeking large-scale investment
Best suited for
Established, profitable SMEs where the owners actively work in the company and want liability protection alongside tax advantages.
Experts to Guide You to the Right Business Structure
Choosing the right business structure is about understanding your goals, your risk tolerance and the long-term direction of your company.
- Sole proprietorships and partnerships offer simplicity, but little protection
- Partnerships offer flexibility and more hands on deck
- LLCs strike a balance between flexibility and security
- C corps and S corps support more ambitious growth plans, but with more obligations attached.
Ready to set up your business and get your structure right? Use the advice of a company registration expert to guide you through the process. Not only does this help early stage entrepreneurs get started, it makes the whole process 10 times easier for setting up a business address, registering on Companies House, and choosing your business structure.
