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Sole traders and partners are personally responsible for the business's debts and pay income tax on its profit. A company limits the owners' liability and pays corporation tax, with more to file each year.
All guidesA café, pub, restaurant or B&B can be run by a sole trader, by two or more people in partnership, or by a limited company. The choice decides who is responsible for the debts, how the profit is taxed, and what has to be filed each year.
A sole trader works for themselves and keeps all the profits after tax. GOV.UK says sole traders have unlimited liability: the owner is "personally responsible for all of the debts of the business". In a partnership the partners personally share responsibility for the business's losses and bills, and each partner pays tax on their share of the profit. A limited company is legally separate from the people who own it and is run by one or more directors. Its owners are responsible for its debts only up to the value of their investment.
A personal guarantee changes that for whatever it covers. A director who signs a personal guarantee for the company's lease, overdraft or loan is liable for it if the company cannot pay.
| Sole trader | Partnership | Limited company | |
|---|---|---|---|
| Debts of the business | The owner is personally responsible for all of them | The partners personally share responsibility for them | Owners are responsible up to the value of their investment |
| Tax on profit | Income tax and Class 4 National Insurance | Each partner pays income tax and Class 4 on their share | Corporation tax at 19% to 25%, then tax on salary and dividends |
| Registering | Self Assessment, if trading income is over £1,000 | The partnership and each partner register for Self Assessment | Companies House before trading, then corporation tax |
| Returns each year | Self Assessment by 31 January | A partnership return and each partner's own return | Accounts to Companies House, company tax return to HMRC, confirmation statement |
| Making Tax Digital for Income Tax | From April 2026, 2027 or 2028, by turnover | No date set yet | Does not apply to the company |
A sole trader pays income tax on the profit of the business, whether it is drawn out or left in the bank. For 2026/27 the personal allowance is £12,570, the basic rate of 20% applies up to £50,270, the higher rate of 40% up to £125,140, and 45% above. The personal allowance falls by £1 for every £2 of income above £100,000. Class 4 National Insurance is 6% on profits between £12,570 and £50,270 and 2% above. With profits of £7,105 or more, Class 2 contributions are treated as paid, so the owner's National Insurance record is protected without paying them.
A company pays corporation tax on its profit: 19% on profits under £50,000, 25% above £250,000, and a rate between the two under marginal relief. The owner then pays tax on what they take out as salary or dividends. Profit left in the company is taxed only at the corporation tax rate until it is paid out.
VAT registration depends on the business's taxable turnover, whatever its structure. Registration is compulsory when taxable turnover for the last 12 months goes over £90,000, or is expected to go over it in the next 30 days alone. Taxable turnover includes zero-rated sales such as cold takeaway food.
Income tax £12,232.00 and Class 4 National Insurance £2,496.60. Kept by the owner:
£47,271.40Salary £12,570 and dividend £37,700. Employer National Insurance, corporation tax and dividend tax £14,310.46. Kept by the owner £46,271.00, plus £1,418.54 left in the company:
£47,689.54At £62,000 of profit the company in the example leaves the owner £418.14 better off before the cost of company accounts, payroll and Companies House filings. Profit kept in the company to fund a refit or a second site has paid corporation tax only, and dividend tax is due when it is paid out.
Partners choose a nominated partner, who registers the partnership for Self Assessment, sends the partnership tax return and keeps the business records. Each partner registers separately and sends their own return. Registration is due by 5 October in the business's second tax year.
A partner does not have to be a person: a limited company can be a partner. Where a couple runs a pub or B&B as a partnership, the profit is split in the shares set in the partnership agreement. Put that agreement in writing before trading starts, including what happens when a partner leaves.
Each partner has their own personal allowance and basic rate band. Two partners sharing £62,000 of profit equally have £31,000 each. Each pays £3,686 of income tax and £1,105.80 of Class 4 National Insurance, £4,791.80 each and £9,583.60 between them. A sole trader with the same £62,000 pays £14,728.60. The profit share has to match the partnership agreement and the work each partner does in the business.
Making Tax Digital for Income Tax requires sole traders over a turnover threshold to keep digital records and send quarterly updates through compatible software, then a tax return at the end of the year. HMRC decides who is in from the Self Assessment return two years before.
A café run as a sole trader with £42,000 of turnover in 2025/26 has to use it from 6 April 2027. A B&B run as a sole trader with £24,000 of turnover in 2026/27 has to use it from 6 April 2028. The test is on turnover, so a business with low profits on high takings is still in.
Quarterly updates are due on 7 August, 7 November, 7 February and 7 May for the quarters to 5 July, 5 October, 5 January and 5 April. They are summaries of income and expenses, sent with no tax adjustments. For those who started in April 2026, HMRC will not apply penalty points for late quarterly updates in 2026/27. Penalties for late returns and late payment still apply.
The Self Assessment return for the tax year before the start date still goes in the usual way. HMRC signs people up using the information it already holds, and anyone signing up must be registered for Self Assessment and have sent a return in the last 2 years. The software has to be compatible with Making Tax Digital for Income Tax, and records are kept digitally from the start date.
A limited company is outside Making Tax Digital for Income Tax, although its directors may still send Self Assessment returns for their own income.
GOV.UK says a business can move from one structure to another, and that moving from sole trader to limited company is usually the easier direction. A sole trader who moves the business into a company is transferring a business. If it meets the conditions of a transfer of a going concern, no VAT is charged on the assets, and the company must be registered or required to register for VAT at the date of transfer. The lease, the premises licence, the food business registration, payroll and supplier accounts each need transferring to the company.
We compare the structures on your own figures, set up the structure you choose, and run the accounts, tax returns and Making Tax Digital updates. Accounts, tax, bookkeeping and VAT returns start from £149 + VAT a month, set by your turnover. See accounts and VAT.
6 April 2026 for qualifying income over £50,000, 6 April 2027 over £30,000 and 6 April 2028 over £20,000.
Turnover. It is income from self-employment and property before expenses.
HMRC says they will in future and has not set a date. A partner's share of partnership profit does not count towards qualifying income.
Within 9 months of its year end. The first accounts are due 21 months after the company was registered.
No. Registration depends on taxable turnover over £90,000, whatever the structure.
Send us your last accounts, a recent VAT return and one payroll run. We will show you what we would change and what it would cost each month.