Choosing the right business structure is one of the biggest early decisions when you are starting a business in Scotland, and it can affect everything from your personal risk to how much tax you pay. This article walks through the main options in plain English and explains how Business Lawyers Scotland can help you weigh them up so you can move forward with confidence.
What are the main options when setting up a business in Scotland?
For most people starting a business in Scotland, the realistic choices are being a sole trader, going into a partnership with others, forming a limited company, or using a limited liability partnership (LLP). Each legal structure has different rules on liability, tax and record keeping, so it is worth taking the time to understand the basics before you rush to register anything.
Most small businesses start either as a sole trader or as a limited company, with partnerships and LLPs used where two or more owners are working together with a view to profit. Business Lawyers Scotland often sees clients change structure as they grow, so choosing the “right for now” structure is often more realistic than trying to future‑proof every possible scenario.
What does it mean to be a sole trader?
A sole trader is the simplest way of setting up a business and is often the first stop for consultants, trades, freelancers and very small owner‑managed businesses. You and the business are not separate legal entities, so you are personally responsible for decisions, profits and any debts of the business. In practice, that means if the business cannot pay a creditor, your personal assets can be at risk because you have unlimited liability.
You must register with HMRC for Self Assessment as soon as you start trading, and you’ll register as self‑employed for income tax and National Insurance once your business income goes over the small trading allowance. You will pay income tax on your profits and may also pay national insurance contributions, so keeping on top of record keeping, invoices and expenses is essential if you want your tax return to be accurate. For many people, the ability to start quickly without involving Companies House is attractive, but you do need to be comfortable being personally responsible for the debts of the business.
How do partnerships work for two or more people?
A general partnership is usually formed where two or more people go into business together with a view to profit, but do not set up a limited company. It is still a relatively simple business structure, but each partner is jointly and severally liable for the partnership debts, which means any one partner can be held liable for all the debts if things go wrong. That unlimited liability often comes as a surprise to people who assume risk is automatically shared in a neat percentage.
In law, a general partnership is not fully legally separate from the people who run it, and each partner must file a self assessment tax return and pay income tax on their share of profit. A well‑drafted partnership agreement is vital to determine how profits and losses are split, what happens if a partner wants to leave, and how decisions are made day‑to‑day. Business Lawyers Scotland regularly helps clients put partnership agreements in place so that everyone is clear on their responsibilities and no one is left personally responsible for unexpected partnership debts.
What is a limited company and when is it useful?
Most people talking about limited companies in Scotland are referring to a private limited company that is limited by shares. A company limited by shares is a separate legal entity, and the company is legally separate from its owners, which means the company may own assets, enter into contracts and be sued in its own name. This separate legal identity is often the main reason people move from being a sole trader to a limited company as they grow.
In a company limited by shares, the directors and shareholders have different roles: directors manage the company, and shareholders own the shares and have invested in the company. In many cases, especially in small Scottish businesses, one person is both a director and shareholder, but the distinction still matters for liability and governance. Limited companies are subject to tax on their profits (Corporation Tax), and directors may draw a salary and a dividend, which can change the overall tax and national insurance position compared with being a sole trader.
What is meant by limited liability?
One of the biggest attractions of limited companies and LLPs is limited liability. In simple terms, the owners are only liable for the debts of the business up to the amount they have invested or guaranteed, rather than risking all of their personal assets. That can feel like a safety belt when you are committing to leases, borrowing or taking on staff, although lenders sometimes still ask for personal guarantees.
By contrast, a sole trader or general partnership carries unlimited liability, meaning the owner’s or partners’ personal assets can be used to pay partnership debts or other business debt. Even with limited liability, banks or landlords often want personal guarantees from directors or partners, so limited status does not remove risk entirely, and you may still be personally responsible in certain situations. Business Lawyers Scotland regularly advises on when those guarantees are reasonable and how they fit with your overall risk profile.
How do you register a limited company with Companies House?
If you decide a company is right for your new business, you must register the company before you start trading. To register a Scottish company, you need a unique name, a registered office address in Scotland, at least one director and at least one shareholder, and you must also register the company for Corporation Tax after incorporation. You need to follow the Companies Act rules when setting it up, and you need to be registered correctly from day one.
You register with Companies House online or by post, and once the application is accepted, Companies House issues a Certificate of Incorporation confirming that the company limited by shares exists as a UK company under Scottish jurisdiction. From that point, you must also register with HM Revenue & Customs for Corporation Tax, and the company will need to file annual accounts and company tax returns each tax year. Business Lawyers Scotland often works alongside your accountant to make sure the company is set up correctly and nothing important is missed at the outset.
What are my tax responsibilities under each business structure?
The business structure you choose affects how your profits are subject to tax and which returns you need to file. As a sole trader or in a general partnership, you pay income tax personally on your share of the business profits, and you’ll usually register with HMRC for self-assessment and may need to pay national insurance as a self‑employed person. Each partner must also register individually, and every partner must also register for their own Self Assessment and needs to pay income tax on their share.
A limited company, by contrast, pays Corporation Tax on its profits and then directors or shareholders pay additional tax depending on how money is taken out, whether as salary, bonus or dividend. That can create planning opportunities, but also more complex record keeping and compliance, including annual accounts and company tax returns. An llp (limited liability partnership) is a slightly different blend: the LLP itself is treated more like a partnership for tax, so members pay income tax on their profit share, but they enjoy limited liability similar to a company.
What is a limited liability partnership (LLP) and when might it suit?
A limited liability partnership (LLP) is often used by professional firms and some joint ventures where flexibility and limited liability are both important. Like a company, an LLP is legally separate from the people who own it, and LLPs must be registered at Companies House, file accounts and comply with statutory rules. Unlike a company limited by shares, there are “members” rather than shareholders, and profits usually flow straight through to members’ personal tax returns.
In many cases, an LLP can be a helpful halfway house between a traditional partnership and a limited company, giving protection on liability while still allowing some partnership‑style flexibility on profits and losses. However, LLPs bring more formalities than a simple partnership, and you still need a robust members’ or partnership agreement to set out how you determine how profits are shared, what happens when a partner wants to leave, and how disputes are handled. Business Lawyers Scotland can help you decide if an LLP structure fits your business plan and sector, or if a straightforward company might be more practical.
What risks should I think about around debts and personal guarantees?
One of the most important things to consider is who ends up personally responsible if the business cannot pay its debts of the business. As a sole trader or in a general partnership, you are personally responsible and can be sued personally, and partners are jointly and severally liablewhich means a creditor can pursue any one partner for the full debt. If you fail to plan for this, the owner’s home or savings can be exposed in a way they never expected.
Even in a limited company or LLP, lenders, landlords and suppliers sometimes ask directors or members for personal guarantees. This can nibble away at the protection of limited liability if you are not careful, because in those cases, you are also personally responsible if the company cannot pay. Business Lawyers Scotland often reviews guarantee documents for clients and explains in straightforward terms what they are signing up to before they commit.
How do I actually get started and who must register with whom?
When you are setting up a business, there are several registrations that must be registered or need to be registered, depending on your chosen structure. Sole traders and partners must register with HMRC for Self Assessment, and you’ll register for VAT if you cross the threshold, while company directors must register with HM Revenue for any personal tax obligations. A private company or LLP must register with Companies House, and you’ll register the company separately for Corporation Tax.
You should never include personal or financial information you do not understand in official filings, and if you are unsure what you’ll register for, speaking with Business Lawyers Scotland or your accountant before submitting forms can save a lot of hassle later. In many cases, you’ll register online through gov.uk or mygov.scot, and you need to follow the guidance carefully.
Can I change from sole trader to a limited company later on?
People often assume that whatever they choose at the start is fixed, but in reality, it is usually easier to move from sole trader to a limited company or from a trader to a limited company structure later, when the business has grown. For many very small businesses, starting as a sole trader lets them test the market, then incorporate as a private limited company once profits and risks increase. This staged approach can work well if you are still feeling your way.
That said, switching structure does involve extra administration, tax planning and sometimes transfers of contracts, leases and assets into the company, so it is not something to rush into without advice. Business Lawyers Scotland often helps clients plan that transition so they understand what they need to do with Companies House, HMRC, existing contracts and any record keeping that needs to be tidied up before the change. A short chat with a solicitor can give you a clear sense of timing and whether incorporation now or later makes most sense in your situation.
How can Business Lawyers Scotland help with choosing the right structure?
Choosing the right legal structure is not just a tick‑box exercise; it shapes how you work with co‑owners, how you are paid, and how exposed you are if things go wrong. For most people, choosing the right business structure means balancing commercial ambition, practical tax issues and very human concerns about family, mortgages and long‑term security. That is exactly where Business Lawyers Scotland’s corporate and commercial team adds real value, because they see every day how these decisions play out in real businesses across Scotland.
If you would like to talk through your options before you start trading, the Business Lawyers Scotland team can work alongside your accountant to sense‑check your plans, your risk appetite and how your business plan fits with each structure. A short early conversation can make the rest of the process much smoother, and it can be reassuring to know that you are not missing anything obvious before you commit to a particular structure or register a company. Reaching out for early advice does not commit you to anything; it simply gives you clearer choices.
- Sole trader is the simplest way to start, but carries unlimited liability, meaning you are personally responsible for business debts and must keep on top of self-assessment tax and record keeping.
- General partnerships involve two or more people and shared profits and losses, but partners are jointly and severally liable unless an LLP or company is used instead.
- Limited companies and LLPs offer limited liability and a separate legal identity, but they need annual accounts, tax returns and compliance with Companies House rules.
- The choice of structure affects how you pay income tax, National Insurance and Corporation Tax, so take advice from both a solicitor and an accountant where possible.
- Before you register anything through gov.uk, or Companies House, consider speaking with Business Lawyers Scotland for calm, practical guidance tailored to your plans.
