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Should I be a Partnership / Sole Trader / Ltd

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By Richard Turner – Alpaca

Business structure – a quick overview

You’ve had a good business idea, put together a business plan and now you’re ready to branch out on your own.  What is the best structure for your new venture?  For the purpose of this blog we’ll be exploring the pros and cons of setting up a business as a: sole trader; partnership; or a limited company and setting out the practicalities of each.

Sole Trader

A lot of businesses start life as sole traders because it is the simplest way of setting up.  There are very few legal formalities and you do not need any formal registrations in order to trade. 

What’s good about it?
  • It’s a quick and easy way of getting started and at the end of the day, if you are successful, the profits are yours to keep and will only become subject to income tax if the total comes to more than your personal allowance.
Beware of…? 
  • Because the business is linked entirely to you, there is no separate legal entity. This means that whilst you receive all of the profits, you will also be personally liable for the debts.
  • If this is a risky or larger investment, think twice about whether this is the right structure for you.
  • You should also note that as it is solely linked to you, it’s unlikely to be easy to sell the business on to anyone else.

Where do I start?

Pick a name, any name, and start trading.  You will need to register with HMRC within 3 months and you will have to pay class 2 and 4 national insurance contributions, but these are generally lower than what you would usually pay.

Partnership

A partnership, like a sole trader, has no formal, legal identity.  It is an arrangement between 2 and 20 people to own a business together.

What’s good about it?
  • Just like with a sole trader, all profits earned are split between the partners in accordance with the partnership agreement.
  • Further capital can be raised by selling partnerships.
  • There is a great deal of flexibility as the partners can agree between themselves how the partnership is run and who will be responsible for what.
Beware of…? 
  • Partnerships are reliant on good relationships. A disagreement could spell disaster. 
  • If one partner is negligent, all of the partners in the agreement can be on the hook for it.
  • Like with sole traders, there is no separate legal entity so partners will have to take a share of any debts incurred and a lack of legal framework makes it difficult to sell the business on.
Where do I start?

I cannot stress enough the importance of having a properly drafted and signed partnership agreement.  Partnerships can be very risky without a formal agreement setting out the “rules” for each partner to abide by.  Think about: what capital you will each contribute, how profits will be distributed and when, day to day responsibilities, what happens if someone dies, how to end the agreement etc.

Limited Company (Ltd)

The Oxford dictionary defines a limited company as “A private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested.”

What’s good about it?
  • As a limited company is a separate legal entity, your liability will be restricted to that of your initial investment.
  • If you are a higher earner, there may be tax advantages available to you by way of keeping money in business or pension schemes.
  • The business will be much easier to sell on either as a whole or in parts.
Beware of…?
  • The cost of setting up a limited company will be much higher than a sole trader or a partnership and there are a number of formalities to follow.
  • You will have to file annual accounts and may also be required to submit audited accounts which can be expensive.
  • You should have an awareness of legislation and any changes that may impact on your business.
  • There will be an obligation to pay employer’s national insurance contributions.

Where do I start?

It’s certainly not as easy as setting up as a sole trader but there is lots of useful information online.  Look at the Companies House website which will take you through the formal steps of setting up a new company https://www.gov.uk/limited-company-formation

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