When we think about setting up a business, we need to think about what type of legal entity we will make our business.

Each entity has different costs in the set-up and maintenance, different responsibilities and different compliance. For business Law purposes, a “legal entity” is any individual, company, business, or organization that can legally enter into a binding contract with another legal entity. … The four most common legal entities are:

  • Sole Trader
  • Partnership
  • Limited Liability Partnership
  • Limited Company


sole trader is a self-employed person who owns and runs their own business as an individual. A sole trader business does not have any legal identity separate to its owner, leading many to say that as a sole trader you are the business.  To learn more about setting up a sole trader business follow this link to the HMRC website



A traditional Partnership can be set up when two or more people come together to carry on a business.  The legal status of a Partnership is similar to that of a sole trader But instead of having one owner, there will be two or more Partners running the business and they each have a share in the ownership of that business.  To learn more about setting up a partnership business follow this link to the HMRC website,uk/set-up-business-partnership



A Limited Liability Partnership was introduced in 2000 so is a fairly new entity.  It is different to the traditional partnership in that it is a hybrid between a limited company and a traditional partnership. The business will be incorporated with Companies House and it will be separate from its members.  A key characteristic of an LLP is that, unlike a traditional partnership, its members benefit from limited liability. This means that the members’ liability is generally limited to the amount they have invested or agreed to invest in the LLP. There is no limit to the number of members.  For more details on Limited Liability Partnerships please follow this link to the HMRC website:



A Limited Company is an entity that has been incorporated at Companies House as a legal structure. It is separate from its owner and can enter into contracts in its own name.  It is responsible for its own actions, finances and liabilities. The owners of a company are protected by ‘limited liability’, which means they are only responsible for business debts up to the value of their investments or what they guarantee to the company. A limited company must be registered at Companies House (UK registrar of companies) as ‘limited by shares’ or ‘limited by guarantee‘. Limited by shares companies are owned by one or more shareholders and managed by one or more directors. Limited by guarantee companies are owned by one or more guarantors and managed by one or more directors.

We suggest careful consideration of the best entity for your business before setting it up – each of these entities has advantages and disadvantages and the choice will depend upon how you wish to trade.  If you would like us to talk you through the different business entities, please contact us. A well thought through plan at the start of a business will be a good foundation.



In addition, businesses may be referred to as micro and small sized entities.  This has nothing to do with the legal aspects of the business but classifies a business for financial reporting.

Micro entity:  should have any 2 of the following: a turnover of less than £632,000 and £316,000 or less on its Balance Sheet or less than 10 employees.  If your business is a micro-entity you can

    • prepare simpler accounts that meet statutory minimum requirements
    • send only your balance sheet with less information to Companies House
    • benefit from the same exemptions available to small companies

Small entity:   should have any 2 of the following:  a turnover of less than £10.2 million and £5.2 million or less on its Balance Sheet and 50 or less employees.  If your business is a small-entity you can

  • use the exemption so your company’s accounts do not need to be audited
  • choose whether or not to send a copy of the director’s report and profit and loss account to Companies House
  • send abridged accounts to Companies House
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