Tax‑Efficient Business Structures for Startups

Tax‑Efficient Business Structures for Startups

Choosing the right business structure at the start of your journey can make a big difference to how much tax you pay, how easy it is to raise investment, and how flexible your business is as it grows.

There’s no one‑size‑fits‑all answer. The most tax‑efficient structure depends on your plans, your risk profile, and whether you expect to bring in investors. In this article, we walk through the most common UK business structures for startups, their tax advantages and disadvantages, and when each one tends to work best.

Your business structure affects:

• How profits are taxed
• How and when you can take money out
• Whether losses can be used personally
• How attractive the business is to investors
• Your exposure to personal risk

Getting this right early can save time, cost, and restructuring headaches later.

1. Sole Trader – Simple, but Limited

How it’s taxed

As a sole trader:

• Profits are taxed through Self Assessment
• Income tax is charged at 20%, 40% or 45%
• You also pay Class 2 and Class 4 National Insurance

Advantages

• Very simple and low‑cost to set up
• Minimal reporting and admin
• Losses can often be offset against your other personal income

Disadvantages

• No separation between you and the business (personal risk)
• Tax rates can be high as profits grow
• Not suitable for external investors

Example scenario

A freelance consultant or contractor testing a new idea with low risk and no immediate plans to scale may start as a sole trader for simplicity.

2. Limited Company (Ltd) – The Startup Favourite

For most growth‑focused startups, a limited company is the default choice.

How it’s taxed

• Profits are subject to Corporation Tax (currently up to 25%)
• Directors typically take income via a mix of salary and dividends
• Dividends are taxed at lower rates than salary (depending on income level)

Advantages

• Clear separation between personal and business finances
• Often more tax‑efficient once profits increase
• Attractive and familiar structure for investors
• Access to reliefs such as:
• Business Asset Disposal Relief (BADR)
• Enterprise Investment Scheme (EIS) and SEIS
• R&D tax relief

Disadvantages

• More admin and compliance
• Profits can be taxed twice (company and shareholder level)
• Less flexibility in using losses personally

Example scenario

A tech startup planning to raise investment, reinvest profits, or scale quickly will almost always operate through a limited company.

3. Limited Liability Partnership (LLP) – Flexible but Less Investor‑Friendly

An LLP is often used by professional services firms, but it can be suitable for certain types of startups.

How it’s taxed

• The LLP itself does not pay corporation tax
• Profits are taxed directly on the members as self‑employed income
• Each member pays income tax and National Insurance on their share

Advantages

• Limited liability protection
• Very flexible profit‑sharing arrangements
• Losses may be offset personally (subject to rules)

Disadvantages

• Higher personal tax rates as profits grow
• Less attractive for equity investors
• More complex personal tax compliance for members

Example scenario

A founder‑led consultancy or professional services startup, where profits are regularly withdrawn rather than reinvested, may prefer an LLP structure.

4. Partnership – Rarely Used for Scalable Startups

Traditional partnerships are similar to LLPs but do not offer limited liability, which makes them uncommon for modern startups.

When might this work?

• Low‑risk businesses
• Short‑term ventures
• Situations where simplicity outweighs risk

For most startups, an LLP or Ltd company will be more appropriate.

5. Holding Companies and Group Structures

As startups grow, some move to a group structure, often with a holding company owning one or more trading subsidiaries.

Why consider this?

• Helps ring‑fence risk
• Allows profits to be moved between companies tax‑efficiently
• Can support future exits or partial sales

These structures are usually implemented after growth or investment, rather than on day one, and require careful planning.

How On The Go Accountants Can Help

We help startups and founders:

• Choose the right structure from day one
• Review whether their current setup is still tax‑efficient
• Prepare for investment, scale, or exit
• Restructure as the business evolves

If you’re setting up a new venture – or wondering whether your current structure is holding you back – we’re happy to help you think it through.

Get in touch with our team to discuss your options.