The short answer to this question is no, a business does not have to be a limited company. A person setting up in business alone has the choice of not having a limited company and conducting business on his or her own account as a self-employed person (a sole trader), or of having a company registered. If there are two or more people involved in the business then they have the choice of trading as a partnership, a Limited Liability Partnership (LLP) or of forming a limited company. If a limited company is not formed, the owners of the business are personally liable for all the debts incurred and run the risk of personal bankruptcy.
Many businesses start life as sole traders or partnerships and convert to limited companies later when the size of the business makes limited liability and a corporate structure more important, or for tax reasons. This database does not deal with the law relating to sole traders or partnerships.
For more information on this topic go to the company choice page on the Incorporation Services website. This explains the pros and cons of setting up a limited company.