Choosing a legal structure is one of the first decisions you make when starting a business in Scotland, and one of the most important. It decides who is responsible if the business runs into debt, how profits are taxed, what you need to register and how much of your information is public. This guide compares the main options under Scots law in plain English, including one point that often surprises people: a Scottish partnership is a legal person in its own right.
In brief
- Most new businesses are set up as a sole trader, a partnership, a limited company or a limited liability partnership (LLP).
- Sole traders and general partners have unlimited personal liability for the debts of the business.
- Limited companies and LLPs give limited liability, but lenders and landlords often ask for personal guarantees.
- In Scotland, a partnership is a separate legal person, unlike in England, although the partners are still personally liable.
- You can change structure later, but moving contracts, premises and staff takes planning, so take advice early.
The options at a glance
| Structure | Personal liability | Separate legal person? | Tax on profits |
|---|---|---|---|
| Sole trader | Unlimited | No | Income tax and National Insurance on all profits |
| General partnership | Unlimited, joint and several | Yes, in Scotland | Each partner pays income tax and National Insurance on their share |
| Limited company | Limited to unpaid share capital | Yes | Corporation Tax, then personal tax on salary and dividends |
| LLP | Limited, as agreed between members | Yes | Each member pays income tax and National Insurance on their share |
Sole trader
A sole trader is the simplest way to start. There is no separate legal entity: you are the business, you keep all the profits after tax and you make all the decisions. Many consultants, tradespeople and freelancers start this way because it is quick, cheap and private.
The trade-off is unlimited liability. If the business cannot pay its debts, creditors can pursue your personal assets, including savings and potentially your home, and in Scotland personal insolvency means sequestration.
Practical requirements are light. You must register for Self Assessment by 5 October after the end of the tax year in which you started trading, unless your trading income is covered by the £1,000 trading allowance. If you are a Scottish taxpayer, your profits are taxed at Scottish income tax rates, plus Class 4 National Insurance. Making Tax Digital for Income Tax now applies to sole traders with qualifying income above £50,000, falling to £30,000 from April 2027 and £20,000 from April 2028, which means digital records and quarterly updates to HMRC.
Partnership
A partnership exists whenever two or more people carry on a business together with a view to profit, whether or not anything is written down. Here Scots law differs from English law in an important way. Under section 4(2) of the Partnership Act 1890, a Scottish partnership, known as a firm, is a legal person distinct from its partners. It can enter into contracts and sue and be sued in its own name.
That separate personality does not give the partners limited liability. Each partner is jointly and severally liable for the debts of the firm, so a creditor who cannot recover from the firm can pursue any one partner for the full amount.
Without a written agreement, the 1890 Act fills the gaps with default rules that rarely suit a modern business: profits are shared equally regardless of what each partner puts in, any partner can bring a partnership at will to an end by giving notice, and the death or bankruptcy of a partner dissolves the firm unless the partners have agreed otherwise. A partnership agreement sets out profit shares, decision-making, what happens when a partner leaves and how disputes are resolved. Each partner files their own Self Assessment return, and a nominated partner files a partnership return.
Limited company
A private company limited by shares is the most common structure for growing businesses. The company is a separate legal person that owns its assets, enters into its own contracts and is responsible for its own debts. Shareholders own the company and their liability is limited to any unpaid amount on their shares. Directors run it and owe statutory duties to the company under the Companies Act 2006. In small companies, the same people are often both.
To form a Scottish company you register with Companies House, choosing a registered office in Scotland. You will need:
- a company name that is not the same as an existing one
- a registered office address in Scotland and a registered email address
- at least one director, who must be an individual, and at least one shareholder
- details of the shares issued and of any people with significant control
- Articles of Association, either the Model Articles or your own
- identity verification for directors and people with significant control, which has been a legal requirement since 18 November 2025
After incorporation you must register for Corporation Tax within three months of starting to trade. Corporation Tax is charged at 19% on profits up to £50,000 and 25% on profits over £250,000, with marginal relief in between. Directors usually take a mix of salary and dividends. For Scottish taxpayers, salary is taxed at Scottish rates while dividends are taxed at UK dividend rates, which can make the comparison with being a sole trader different in Scotland from the rest of the UK.
Companies must file annual accounts and a confirmation statement, and much of their information is public. If more than one person will own shares, invest time in tailored Articles of Association and a shareholders’ agreement from the start.
Limited liability partnership (LLP)
An LLP combines the limited liability and separate legal personality of a company with the tax treatment of a partnership. It is popular with professional practices such as accountants, architects and consultancies. An LLP needs at least two designated members, is registered at Companies House and files public accounts, while its members are taxed individually on their share of the profits.
The Limited Liability Partnerships Act 2000 provides only basic default rules, so a members’ agreement setting out capital, profit shares, management and exits is essential.
Other structures
- Scottish limited partnership. A partnership with at least one general partner with unlimited liability and one or more limited partners. Today it is used mainly for investment funds and some property and farming arrangements, and it is subject to tighter registration rules introduced by the Economic Crime and Corporate Transparency Act 2023.
- Company limited by guarantee. Members guarantee a small fixed sum instead of holding shares. Common for clubs, membership bodies and charities.
- Community interest company (CIC). A limited company for social enterprises, with an asset lock and a community interest test.
- Scottish Charitable Incorporated Organisation (SCIO). A Scottish legal form for charities, registered with the charity regulator OSCR rather than Companies House.
Liability and personal guarantees
Limited liability is valuable, but it is not absolute. Banks, landlords and some suppliers ask directors or members for personal guarantees, which put your own assets back on the line for that debt. A guarantee for a commercial lease or a business loan should always be reviewed before you sign it, with particular attention to how long it lasts and whether it is capped.
Directors can also become personally liable if they continue trading when they know, or should know, that the company cannot avoid insolvent liquidation. If a company is struggling, early insolvency and director advice protects both the business and the people running it.
Changing structure later
Many businesses start as a sole trader or partnership and incorporate once profits and risks grow. Changing structure is very common, but it is a transaction in its own right. The business, its goodwill and its assets are transferred to the new company, customer and supplier contracts and any lease usually need consent to be assigned, and employees transfer under TUPE.
There are tax consequences too. Incorporation relief may defer Capital Gains Tax on the goodwill, and transferring property can trigger Land and Buildings Transaction Tax, usually on market value. Our guide to transferring property to a limited company explains this further. If you are still at the very start, our shorter guide on where to start when choosing a business structure sets out five questions to ask first.
Frequently asked questions
Is a partnership a separate legal entity in Scotland?
Yes. Under the Partnership Act 1890, a Scottish partnership is a legal person distinct from its partners, so it can own moveable property, contract and sue in its own name. The partners are still jointly and severally liable for its debts.
Which structure is cheapest to set up?
Becoming a sole trader is free: you simply register with HMRC. Forming a company involves a Companies House fee and usually higher ongoing accountancy costs, which is worth weighing against the protection of limited liability.
When should a sole trader become a limited company?
There is no fixed profit level. The usual triggers are taking on significant contracts, staff, premises or borrowing, wanting to bring in co-owners or investors, and profits growing beyond what you need to draw personally. Your accountant can model the tax position and we can deal with the legal transfer.
Do I need a solicitor to set up a company?
It is not a legal requirement, and many single-owner companies are formed online. Where there is more than one owner, a solicitor can make sure the Articles, shareholders’ agreement and share structure reflect what you have agreed, which is far easier to do at the start than later.
Can I run more than one business under different structures?
Yes. You can be a sole trader in one business and a director or shareholder of a company in another. Each business has its own registrations, records and tax returns.
Not sure which structure suits you?
Our business solicitors help new and growing businesses across Scotland choose and set up the right structure, working alongside your accountant on the tax side. Call 0141 471 9166 or book a free consultation.
Related services and guides
This guide reflects Scots law and UK tax rules as at October 2026. It is general information rather than legal or tax advice, so please speak to us and your accountant before deciding on a structure.