Sole trader, limited company or partnership?
- Hundreds of thousands of people across the UK become sole traders every year, making this the most popular way to start a company. The reason? It's easy and simple. As soon as you've registered with HMRC for Tax and National Insurance (which you should do soon after launch) you have a company you can call your own. Sole Traders do not have to register at Companies House.
- Sole traders can and do employ staff, but most often sole traders are people who are striking out on their own.
- The business you create as a sole trader will be all yours. All the profits go to you – but then so too do all the losses. This is important, as you will be personally responsible for any debts that the business may incur. Often people form limited companies to shield their personal assets from any debts the business may make.
- There are no legal stipulations for a sole trader to draw up accounts (although a basic record of revenue and costs should be a minimum for any company). Sole traders simply have to complete a Self Assessment tax return every year – something they can do on their own without the help of an accountant.
- A key advantage for sole traders over other types of business is that normally they can deduct losses made in the first year from future profits or other income they may have. Obviously you won't be setting out to make losses but, if it's a possibility, this could be useful.
- If you like the simplicity of the sole trader set-up but you'd rather other people were involved in your business then it's worth considering a partnership.
- Setting up a partnership is easy (just as it is to set-up a sole trader business) in that you're a fully compliant trading entity the moment you register for tax with HMRC.
- There is no legal requirement to draw up accounts – a Self Assessment tax return is all that is needed – and, if you're likely to make losses in the first year or so, you can normally deduct them from future profits like a sole trader.
- As the joint owner of the company you will split any profits with your partner. If there are any losses, you'll be personally responsible for your share of the debt as well as those of your partners. But, you can get around this by forming a Limited Liability Partnership, which although being more complicated to set up than an ordinary partnership, does reduce responsibility for business debts in the same way as a limited company.
- Partners often enjoy having someone else around who can help shoulder the workload. But, given that starting a business with someone can be more intense than marrying them, it's sensible to get a solicitor to draw up a written partnership agreement before you start out. The agreement should deal with how the profits and work are split and what happens if one of you decides to up sticks and leave.
- Sole traders or partnerships might be easy to set up, but the fact that they don't offer protection from a company's debts makes a limited company a more attractive option for many. As a director of a limited company, and as long as you operate legally, your personal assets won't be at risk if your company can't pay back a debt.
- Business people often choose to set up a limited company because they believe that to do so lends credibility to their endeavours.
- Setting up a limited company is not difficult and is done by filling out a number of forms, all of which are available from the Companies House site. If you'd rather not do this yourself, an accountant will be able to help you. (You can find an accountant through the ACCA.
- The accounts for a limited company must follow a form set out in law. They will need to be drawn up by an accountant then submitted to Companies House. The fact that you must use an accountant has an upside – they should be able to advise on how you can legitimately extract maximum value from your firm (by, for example, supplementing your wages with dividends).
GOV.UK types of company: © Crown Copyright. Source: www.gov.uk
HMRC, © HMRC, 2011. Source: www.hmrc.gov.uk