When you start working for yourself, choosing a business structure probably isn’t at the top of your list.
You’re more likely to be thinking about finding customers, doing the work, sending invoices and getting paid.
But as the business grows – particularly if you’re working with someone else – the way you structure the business can make a big difference to how easy it is to manage, how much administration you have and how you pay tax.
One question we’re often asked is:
“Should we be a partnership or set up a limited company?”
There isn’t one answer that works for every business. The right structure depends on your circumstances, your profits, what you want to do with the money the business makes and how much administration you’re prepared to take on.
So, let’s look at the key differences.
First things first: what is a partnership?
A partnership is a relatively straightforward way for two or more people to run a business together.
The partners share the profits of the business according to an agreed arrangement. This doesn’t necessarily have to be 50/50, although that is common.
For tax purposes, the partnership itself generally doesn’t pay Income Tax on its profits. Instead, the profits are calculated for the partnership and then allocated between the partners, who pay tax on their individual share through their Self Assessment tax returns.
A partnership also needs a nominated partner who is responsible for dealing with the partnership’s tax return and keeping the business records.
Importantly, the partners are personally responsible for the business’s debts and obligations.
That last point is one of the biggest differences between a traditional partnership and a limited company.
So, what is a limited company?
A limited company is a separate legal entity from the people who own and run it.
The company has its own finances, assets and liabilities. The shareholders own the company, while the directors are responsible for running it.
This means that, generally, the company’s debts are the company’s responsibility rather than automatically becoming the personal debts of the shareholders.
However, limited liability doesn’t mean that directors can simply ignore their responsibilities. Directors have legal duties and are responsible for making sure the company keeps appropriate records, prepares accounts, files the necessary returns and pays its taxes.
And this is where the first big trade-off appears:
A limited company can provide greater separation between you and the business, but it also comes with more administration.
Partnership vs Limited Company: the key differences
| Partnership | Limited Company | |
| Who owns the business? | The partners | The shareholders |
| Who runs it? | The partners | The directors |
| Legal identity | Generally not separate from the partners | Separate legal entity |
| Responsibility for debts | Partners are generally personally responsible | Company is generally responsible |
| How profits are taxed | Partners pay tax on their share of profits | Company pays Corporation Tax; owners then pay personal tax when money is taken out |
| How you take money out | Partners can generally take drawings from their share of the business | Usually salary, dividends, expenses or other permitted payments |
| Annual administration | Partnership Tax Return + individual Self Assessment returns | Company accounts, Corporation Tax Return, Companies House filings and individual tax returns |
| Financial separation | Can be relatively simple | Strict separation between company and personal finances is essential |
| Flexibility over profit allocation | Can be agreed between partners | Dividends generally follow shareholdings unless shares are structured differently |
| Perceived professionalism | Depends on the business | Some businesses prefer the appearance of being a limited company |
| Changing the structure later | Possible | Possible, but requires planning |
What about tax?
This is often where the conversation starts – and where things can get a little misleading.
You may have heard that “limited companies are more tax efficient.”
Sometimes they are.
Sometimes they aren’t.
It depends on the numbers.
With a partnership, each partner is taxed personally on their share of the partnership’s profits. Self-employed people may also have Class 4 National Insurance to pay depending on their level of profits. For 2026/27, Class 4 National Insurance is 6% on profits between £12,570 and £50,270, reducing to 2% above £50,270.
With a limited company, the company pays Corporation Tax on its taxable profits. For companies with profits of £50,000 or less, the current small profits Corporation Tax rate is 19%. Companies with profits between £50,000 and £250,000 may qualify for Marginal Relief, while profits above £250,000 are generally subject to the 25% main rate.
But that’s not the end of the story.
The owners then need to consider how they extract money from the company.
That could include salary, dividends, reimbursement of business expenses and potentially leaving some profits in the company.
Dividends are paid from company profits after Corporation Tax and aren’t deductible when calculating the company’s Corporation Tax liability.
So comparing a partnership’s Income Tax bill with a limited company’s Corporation Tax bill alone doesn’t tell you which option is cheaper.
You need to look at the overall tax position.
An example: two people working together
Let’s say two brothers are working together.
Between them, the business generates around £65,000 of annual turnover.
They split the income 50/50 and share the expenses between them. One might pay for a business expense from their personal account, the other might pay another bill, and they transfer money between themselves to even things up.
Sound familiar?
This is a situation we see quite often.
And the first question isn’t necessarily:
“Should you become a limited company?”
It might actually be:
“Would a proper partnership structure make what you’re already doing much easier?”
If they are genuinely carrying on a business together and sharing the profits, they may already effectively be operating as a partnership, whether or not they’ve formally thought of themselves that way.
A properly structured partnership could give them:
- One set of business records
- One business bank account
- Clear records of income and expenses
- An agreed profit-sharing arrangement
- A clear process for dealing with money each partner puts into or takes out of the business
- A partnership tax return
- Each partner’s share of the profit reported on their own Self Assessment
Instead of constantly transferring money between personal accounts and trying to work out who has paid for what, the business finances can be kept together.
That alone could make a significant difference to how easy the business is to manage.
But what about setting up a limited company?
A limited company could also provide a much clearer financial structure.
The company would have its own bank account and its own accounting records.
The two brothers could each own shares in the company and become directors.
The customers would pay the company. Business expenses would be paid by the company. The company would then calculate its profits and pay Corporation Tax.
The brothers could take money from the company in appropriate ways, such as salary and dividends, rather than simply transferring money between themselves whenever one of them needs to be paid.
This can make the distinction between business money and personal money much clearer.
But there is a trade-off.
A limited company brings additional responsibilities and administration. The company needs to keep proper records, prepare annual accounts, file a Corporation Tax Return and meet its Companies House obligations. Directors remain legally responsible for ensuring these requirements are met.
So if the business is relatively small and straightforward, the additional administration may not necessarily be worthwhile.
It’s not just about turnover
One of the biggest misconceptions we come across is that there’s a particular turnover figure at which you should automatically become a limited company.
There isn’t.
A business turning over £60,000 isn’t automatically better as a partnership.
And a business turning over £200,000 isn’t automatically better as a limited company.
Turnover is only one part of the decision.
You also need to consider:
How much profit are you making?
Turnover isn’t the same as profit.
A business turning over £65,000 with £50,000 of expenses is very different from one turning over £65,000 with £10,000 of expenses.
The amount of profit each person is making will have a significant impact on the tax comparison.
Do you need the money personally?
If all of the profits are being taken out of the business to pay for everyday living costs, a limited company may produce a very different result from a business that can leave some profits in the company.
Keeping money in a company for future investment, equipment or growth can be one reason a company structure becomes attractive.
Is personal liability a concern?
If the business is taking on significant contracts, borrowing money, employing staff or carrying out work where there is a greater risk of claims, the legal separation offered by a limited company may become more important.
It doesn’t remove all personal risk, and appropriate insurance is still essential, but the structure can provide an additional layer of protection.
Are you planning to grow?
If you’re expecting the business to grow significantly, take on employees, bring in investors or eventually sell the business, a limited company may provide a structure that works well as the business develops.
On the other hand, if you’re happy keeping things small and straightforward, a partnership may be perfectly suitable.
How important is simplicity?
This one is often overlooked.
There is a lot to be said for keeping things simple.
A partnership can be relatively straightforward to operate, particularly where there are only two partners, the profit-sharing arrangement is clear and the business isn’t complicated.
A limited company gives you more structure, but that structure comes with more rules and administration.
Don’t forget the partnership agreement
If you decide that a partnership is right for you, don’t make the mistake of thinking:
“We’re brothers/friends/partners – we’ll be fine.”
It’s still important to agree how the business will operate.
A partnership agreement can cover things such as:
- How profits will be shared
- How losses will be dealt with
- How much money each partner can take
- What happens if one partner puts more money into the business
- What happens if one partner wants to leave
- What happens if one partner stops working in the business
- How decisions are made
- What happens if there is a disagreement
You may never need to rely on the agreement – and that’s exactly the point. Agreeing the rules while everyone is getting along is much easier than trying to work them out when something has gone wrong.
And if you choose a limited company?
The same principle applies.
If two friends, siblings or a husband and wife are setting up a limited company together, it’s worth considering a shareholders’ agreement.
While the company’s articles of association set out the basic rules for how the company is run, a shareholders’ agreement can provide additional clarity around the relationship between the owners.
It can cover things such as:
- What happens if one shareholder wants to leave
- What happens if one person stops working in the business
- How important decisions will be made
- What happens if the shareholders disagree
- Whether one shareholder can sell their shares and to whom
- What happens to the shares if a shareholder dies
- How shares can be valued if someone wants to leave
This can be particularly important where the shareholders are siblings, friends or a husband and wife. You might have complete trust in each other when you start the business, but it’s still worth agreeing what happens if circumstances change.
What about family businesses?
There can also be additional considerations where a husband and wife, or other family members, are working together.
A limited company can sometimes provide greater flexibility over how income is taken from the business. For example, where a spouse genuinely works in the business, the company can employ them and pay an appropriate salary.
There may also be opportunities for other family members to work for the company or, where appropriate, become shareholders and receive dividends. However, there are specific tax and employment rules that need to be considered, so this isn’t something to set up purely as a way of reducing tax.
This is one of the reasons it’s worth looking at the bigger picture when choosing your business structure. The right answer isn’t necessarily the structure with the lowest tax bill today – it’s the structure that works for you, your business and your plans for the future.
So, which is better?
The honest answer is:
It depends.
A partnership isn’t simply the “basic” version of a limited company, and a limited company isn’t automatically the “better” or more tax-efficient option.
For some businesses, a partnership provides exactly what they need: a simple structure, relatively straightforward administration and a clear way for two or more people to work together.
For others, the legal separation, flexibility and potential tax-planning opportunities offered by a limited company make it the better choice.
And sometimes the biggest improvement isn’t changing the structure at all.
It is simply getting the existing structure organised properly.
If you’re currently self-employed and working with someone else, particularly if you’re sharing income and expenses between you, it’s worth taking a step back and asking whether your current arrangements still make sense.
Don’t choose a business structure based on what someone else is doing or because you’ve heard that “limited companies pay less tax”.
Look at the whole picture – your profits, how you use the money, your plans for the business, the level of risk you’re taking on and how much administration you want.
And if you’re not sure?
That’s exactly what your accountant is there to help you work out.