Legal Forms of Self-Employment in the United Kingdom

In today’s economy, self-employment is becoming an increasingly popular choice for those seeking greater autonomy and flexibility in their work. This topic is of particular importance for many Ukrainians who have recently arrived in the United Kingdom.

Self-employment entails working for oneself rather than for a specific employer, granting people the freedom to set their own working hours, prices, and client preferences. While offering greater independence, self-employment also demands increased responsibility for managing one’s business affairs. Self-employment takes various forms, each with its own activities and operational requirements. Here are the main types of self-employment in the United Kingdom and their characteristics:

Sole Trader

A Sole Trader is one of the most common and simplest forms of self-employment. The main requirement is that the business is owned and operated by one person. At the same time, a Sole Trader may hire employees.

Becoming a Sole Trader is relatively straightforward—all that is needed is to register as self-employed with HM Revenue and Customs (HMRC). It’s important to note that for a Sole Trader, there is no legal distinction between the individual and the business entity. This means that the individual is personally liable for any debts incurred by the business.

Sole Traders run their own business independently, and all profits belong to them personally after taxes are deducted. Sole Traders must submit an annual tax return and pay Income Tax.

Partnership

A Partnership is a business structure when two or more people come together to jointly own and manage the business, sharing both responsibility and profits. Unlike a Sole Trader, Partnership involves the participation of multiple people pooling their knowledge and resources to run the business together.

All partners in a Partnership must register with HMRC. It’s important for partners to enter into an official agreement detailing how profits are distributed, how business decisions are made, and how responsibility is divided among the partners.

Partnerships operate under joint liability. This means that all partners are collectively liable for the debts of the company, and creditors can demand payment from any individual partner or all partners jointly to recover the full amount owed.

Each partner must file a tax return with HMRC and pay Income Tax on their share of the profits, while a business should submit its overall financial reporting.

Limited Liability Company (LLC or Ltd)

A Limited Liability Company is the most common type of business structure in the UK, suitable for a wide range of businesses, from small enterprises to large corporations with significant turnover. An LLC is a legal entity entirely separate from the individuals who own and manage it. The personal finances of the founders are protected, and they are only liable for the company’s debts up to the nominal value of their share in the company.

To start operating, a company must register with Companies House and have a unique name and registered office address. 

LLCs submit their annual reports to Companies House and file a Company Tax Return with HMRC. They pay Corporate Tax on their profits, and after taxes are paid, profits are distributed among shareholders as dividends.

Directors also need to file a tax return, but they only pay tax on the money they earn from managing the business, not on the company’s profits.

Limited Partnership (LP)

A Limited Partnership is a business structure that includes one general partner and one or more limited partners. LPs typically arise when individuals and legal entities combine their resources to create a joint commercial venture.

In anLimited Partnership, each partner takes on separate roles and responsibilities:

The general partner is responsible for managing the business and bears unlimited liability for its debts and obligations.

Limited partners contribute capital or assets to the partnership but typically refrain from participating in day-to-day operations. Their liability is limited to the extent of their investments, protecting personal assets from the partnership’s obligations.

To create an LP, registration with Companies House is required. LPs are not subject to direct taxation; instead, any profits are taxable on the partners. The business itself must file a tax return each year with HMRC.

It is recommended to formalise profit-sharing agreements when establishing Limited Partnership. 

Limited Liability Partnership (LLP)

A Limited Liability Partnership combines elements of both Partnership and Limited Liability Company. Like traditional Partnerships, LLPs can be formed by two or more individuals or organisations with a shared business vision. Unlike traditional Partnerships, where partners bear unlimited personal liability, LLP offers some protection by limiting partners’ liability to the extent of their investments, similar to a Limited Liability Company.

In an LLP, management responsibilities should be equally distributed. LLPs are typically created and managed by experienced professionals with significant expertise and a client base.

To start operating, LLPs must be registered with Companies House as a legal entity.

While LLPs do not pay Corporate Tax directly, each partner pays Income Tax as a self-employed individual. The company’s annual financial reports must be submitted to Companies House.

Partners decide among themselves how and when to divide profits. Typically, these agreements are laid out in the LLP agreement and can be relatively easily amended as needed.

The general trend in the development of the UK economy indicates an increase in self-employment, which provides greater flexibility and opportunities for personal and professional development. The choice of a specific form depends on the needs and goals of the self-employed person. However, it is important to remember that any form of self-employment requires responsibility for managing the business and fulfilling various tax and legal obligations.