4 types of businesses to start (and factors to consider)

By Indeed Editorial Team

Updated 10 September 2022 | Published 25 June 2021

Updated 10 September 2022

Published 25 June 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

The type of business structure you choose has a significant impact on your business scalability, tax implications and liabilities. It's crucial that you do your research before committing to any form of business. In this article, we focus on the different types of businesses and the factors to consider before choosing one to launch.

Related: How to start a business in 11 easy steps

What are the four types of businesses?

Here are the four types of businesses to choose from when starting an enterprise:

Sole trader

A sole trader is the easiest and simplest type of business to start and register. It's run by one person or jointly with another person. In this type of business, you're your own boss with no board of directors or partners. You are solely responsible for all the business liabilities, profits and losses. All the business income belongs to you, which means you are liable to pay tax and insurance. The more you earn, the more tax you are expected to pay. In this form of business, there's no maximum amount of profits or earnings.

As the sole owner, you're not required to register as a sole trader at the Companies House, but it's crucial to register with HMRC. The main advantage of a sole trader business is that expenses and incomes apply to your income tax record, meaning you can offset the losses the business suffers with revenues from other sources. The only disadvantage is that you have unlimited liability for all legal actions and debts. This means you might depend on personal assets to settle a business debt or legal claim.

Related: Sole trader vs. limited company: definition, pros and cons

Partnership

A partnership is a business owned by two or more people who agree to share business profits and losses. They share the benefits, costs, risks and responsibilities of operating a business. This type of business is commonly referred to as an unincorporated entity because the partners are self-employed.

Like in a sole trader business, the partners have unlimited liability for all debts and legal claims. They are responsible for the business's losses. A partnership doesn't pay income tax. Instead, it records profits and losses on each partner's income records per the agreed profit share ratio. Starting a partnership business is more costly compared to a sole trader one, mainly because of the legal and accounting services needed to incorporate it.

Related: How to set up a business partnership: a step-by-step guide

Limited liability partnership

A limited liability partnership is like a partnership, except that the partner's liabilities are limited. The partners are not at risk of losing their assets to settle business debts. The primary purpose of this form of business is to generate profits.

Unlike the traditional partnership, this type of partnership has to be registered with HMRC and at Companies House. Partners share profits and responsibilities per their agreed share ratio, and each partner pays tax on their profits. Also, for this type of business, it's required that at least two designated partners run the business. You are likely to find this form of partnership in firms of accountants, surveyors and lawyers.

Related: Partnership vs. limited company: definitions and differences

Limited company

Limited companies are the most common business type in the UK because of their potential tax advantages and limited liability. A limited company is a legal business or entity separate from its owners. It's owned by shareholders but operated by its directors. The company has its own legal obligations and rights, so the shareholders are not at risk of losing their assets and wealth in dissolution or legal claims. Additionally, the company retains profits and then distributes them to shareholders in dividends after paying the required taxes.

Limited companies are limited by either shares or guarantees. Being limited by shares means that shareholders are only responsible for liabilities limited by the number of shares they own. A company limited by guarantees implies that it's a charitable company. The company reinvests its profits into itself to achieve its goals, which are usually charitable. The benefits of operating a limited company are the ability to claim expenses from the business and protect your brand. Also, a limited company can easily get extra funding through the sale of shares.

Related: What are business legal structures? (With examples)

Factors to consider when choosing a business structure

Here are the major factors to consider before deciding on the type of business to start:

Control

One of the most significant factors to consider when selecting a business structure is the level of control you hope to have over your new business. With more control comes greater responsibility. For example, if you want to have complete control over your business, it would be best to start a sole trader business instead of a partnership or company.

If you want to reduce your responsibility, you accept less control. Having other partners in the business helps you spread the business responsibilities and liabilities. Types of businesses such as a partnership or a limited company are the best arrangements for reduced responsibility.

Related: Essential business roles and their responsibilities

Cost and complexity

Different types of businesses have varying costs and complexities. Decide how much you're willing to handle to run a business. For example, a sole trader has minimal legal requirements, and the cost of starting is low compared to other forms of business. However, if you have the resources and are patient enough to get all the legal documentation, you can start any type of business you like.

Related: 10 examples of operating costs in business (with definition)

Tax implications

The legal structure of a business has a significant impact on the amount of tax you pay. A sole trader can enjoy tax benefits since they include profits and losses of the business in their personal income tax record. Other revenue sources can also offset your tax liability in your personal income statement. Some structures require double taxation, while others can be quite costly in terms of tax paid. It's crucial that you choose a business with tax demands you can handle.

Continuity of existence

It's essential to consider the future of your business. If you wish for it to continue if you're unable to operate it, a legal structure such as a limited company may be your best option. However, if you want the business to come to an end without you, then a sole proprietorship may be the most appealing.

Risk tolerance

When starting a business, it's essential that you analyse your degree of risk tolerance. If you're a risk-taker, unlimited liability on debts and legal matters may not deter you. However, if you cannot afford to risk your wealth and personal assets, you might prefer to invest in a limited organisation to protect yourself from liability.

Related: What is a private limited company? (plus additional factors)

Flexibility

As you start your business, it's good to envision the future. If you hope to expand the business with time, it's best to register a legal structure such as a limited company. For example, it's quite difficult for a sole trader or partnership to hire new employees or raise capital as time progresses. It may require more licences and permits. Having a business plan can help you decide on the flexibility you need for your business.

Capital investment

If you need any funding to start your business, either from a bank or investors, consider starting a corporation or a company. Companies are better suited to obtain funding compared to sole traders or partnerships. For a sole trader business, you use your own assets to secure additional funds. However, companies can also sell their shares to get more investment capital.

Related: What is owner's capital? Understanding its importance

Business purpose

If you are looking to start a business for charity purposes, it would be best to start a non-profit organisation. Though the paperwork and processes of registration and incorporation may be lengthy, they serve your establishment's actual purpose. If the goal is to make profits, be sure to invest in other forms of business structures such as a sole trader or a limited company.

Privacy

If you want to start a family business without showing your profits or tax filings publicly, it's best to establish a sole trader business or a partnership. Limited companies and limited liability partnerships require you to declare your yearly profits and losses. Accountants can clarify how much privacy each business type offers you.

Licences and permits

Depending on the type of business you establish, there are different laws on licences and permits. As you start your business, be sure to check these regulations for each business type. Consider which would be the most convenient and easy for you to follow.

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