Starting your own business is an exciting step, but before you dive in, it is important to think carefully about the type of structure you will use. The legal vehicle you choose affects everything from how much tax you pay to the level of personal financial risk you take on. In Scotland, there are several common options, each with its own strengths and drawbacks.

Sole Trader

Becoming a sole trader is the simplest way to set up in business. You own the business outright and make all the decisions. Many sole traders employ staff, but the key point is that there is only one owner.

The main advantage is ease of set-up and full control. All profits belong to you and all debts are also your responsibility. If your business runs into difficulty, personal assets such as your home could be at risk. Tax is paid through self-assessment on your profits, and there is no need to publish accounts, which keeps matters relatively private.

Partnership

If you are starting a business with someone else, you may decide on a partnership. This allows two or more people to share ownership, responsibilities, and profits. Not all partners need to be equally involved; some may be “silent partners” who provide funding but do not take part in day-to-day management. Others may be salaried partners who are treated like employees for taxation purposes.


A written Partnership Agreement is strongly advised. These set out how the business is run and what happens if the partners part ways. Without one, you fall back on the
Partnership Act 1890, which is often outdated and inflexible. Partners are taxed on their share of profits but, like sole traders, they remain personally liable for business debts.

Limited Liability Partnership (LLP)

An LLP is a halfway house between a partnership and a limited company. It allows the flexibility of a partnership but protects the personal assets of its members. Creditors can usually only pursue business assets if the LLP runs into financial trouble.

Unlike a traditional partnership, an LLP must be registered with Companies House and submit accounts, though these can often be in abbreviated form. Members are taxed individually on their share of profits, so there is no corporation tax at the business level.

Limited Company

A limited company is a separate legal entity from its owners. Shareholders own the company through shares, while directors are appointed to run it. In some cases, the same person may be both shareholder and director.

The main advantage is limited liability. Shareholders only risk the money they have invested in shares, and directors are generally not personally responsible for company debts. The company pays corporation tax on its profits. Directors who are employees pay income tax through PAYE, and shareholders pay tax on dividends. This can result in “double taxation”, which is an important factor to consider.

Taking Advice

Each business structure carries different implications for tax, liability, and day-to-day management. The right choice will depend on your circumstances, your tolerance for risk, and the way you want your business to grow.

At Paris Steele, we regularly advise clients who are setting up a new venture or reviewing their existing arrangements. Our solicitors take the time to understand your goals and explain the options in plain terms, so you can move forward with confidence. We also work with your accountants who will provide you with advice on financial and taxation matters.

If you are thinking about starting a business or would like to review your current structure, contact Paris Steele today. Our experienced team will guide you through the options and help you put the right framework in place for long-term success.