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Should I be a Sole Trader, Partnership, LLP or Limited Company?

Should I be a Sole Trader, Partnership, LLP or Limited Company?

When starting up your business, deciding on your business’s structure is essential. There are a range of options to choose from:

  • Sole Trader
  • Partnership
  • Limited Liability Partnership, and
  • Limited Company

This page is intended to explain each of the business types, including their advantages and disadvantages, so you can decide which is the best type for you.

What is a Sole Trader?

A Sole Trader is someone who is self-employed and runs their own business as an individual (but can also employ staff members). Being a Sole Trader means you are solely responsible for the business and its debts – the business and the owner are effectively one and the same. This means any losses made by the business must be paid for out of your own pocket This is called Unlimited Liability.

Advantages

  • After you’ve paid tax, you can keep all business profits.
  • You have full control of how your business is run and all decisions can be made by you alone.
  • Your business’s data is kept private (compared to other business types where data is visible at Companies House).

Disadvantages

  • You’re liable for any business losses.
  • It can be difficult for a Sole Trader to financially fund their business ventures.
  • The pressure for a business to succeed is placed on an individual’s shoulders.

What is a Partnership?

Partnership is where two or more people form a business together and all business partners share responsibility for the business. The profits made are split between each partner and they are individually responsible to pay their share of tax.

Advantages

  • The more partners the higher profits possibility and the easier to financially fund the business.
  • A partnership allows a business’s tasks/responsibilities to be assigned to each partner depending on their skills, which takes the stress off just one person.
  • Solving business problems and making decisions can be made easier as you get a selection of opinions/ideas.

Disadvantages

  • The possibility of disagreements/not being able to come to an agreement on how the business is run.
  • Taxation laws say that all partners must pay their own tax, just like a Sole Trader would. Also if a partnership obtains a certain level of profits, the partners may be faced to pay more than they would in a limited company.

What is a Limited Liability Partnership?

A Limited Liability Partnership is a business run by two or more people. The partners are not personally liable for debts the business can’t pay – their liability is limited to the amount of money they invest in the business. The partners profit shares and responsibilities are determined by a LLP agreement.

Advantages

  • The liability of the business isn’t down to one single person, this includes financial issues and business responsibilities.
  • The flexibility of what and how much each partner contributes to the business.
  • Unlimited amount of business partners.

Disadvantages

  • Some businesses/clients don’t see Limited Liability Partnerships as a credible business, whereas corporations are generally more respected.
  • Partners are not legally obliged to consult with other partners when business decisions are being made, which can cause conflicts.
  • The LLP Agreement can sometimes cause issues, if a partner wants a say in another business area but is not allowed to.

What is a Limited Company?

A Limited Company is an organisation that is set up to run a business. Unlike a Sole Trader/Partnership all of your businesses finances are kept separate to your personal finances. After payment of corporation tax, the profits are available to distribute to shareholders as dividends.

There are two types of Limited Companies:

  • Public Limited Company (PLC) – Shares can be bought and sold through a stock exchange.
  • Private Limited Company (Ltd) – Cannot buy and sell shares through a stock exchange.

Advantages

  • When registering a Limited Company you must register the company name with Companies House. This business identity is unique to you and will be protected from other businesses trying to use the same name.
  • You have the option to offer company shares to your employees, which motivates them more and gives the chance to have a say in how the business is run.

Disadvantages

  • Bookkeeping and accounting of a Limited Company is more complex as you are required to keep accurate records as you go along and to submit a range of data each year.
  • Private Limited Companies (Ltd) can’t trade their shares with the public as a way to boost capital.
  • Directors and Shareholders may not agree on how the business is run as well as new ideas.
  • Certain information on the company, its directors and shareholders is avaiable in the public domain.

How H&H Accountants Can Help You

If you require further support or information on what type of company formation you would like to take, we will happily answer any of your questions. For further information on a range of important dates, take a look at our Tax Calendar. We can also assist you with the setting up of your business, so give us a call on 01823 325610 or email us at more@handhaccountants.com.

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