When starting your own business, there are a few options for choosing the structure. Each type of business structure has different pros and cons and different requirements for filing and taxes. You have four main choices when it comes to your business: become a sole trader, form a partnership, start a limited liability company, or start a limited liability partnership (LLP).
If you are thinking about starting your own business but have not decided what kind of structure to go for, here is what you need to know about your options.
Sole Trader
A sole trader is a self-employed person who runs their own business as an individual. Unlike owners of a limited company, a sole trader is personally responsible for every aspect of the business, including any business debts – meaning their personal assets could be at risk if creditors cannot be paid. Common professions for sole traders include photographers, tradespeople, independent hairdressers and business-related services.
Despite working “solely”, sole traders can employ staff, provided they adhere to the regulations of employing as a sole trader. Sole traders do not need to register with Companies House or make ongoing filings of information with them. But you must register with HMRC, and complete self-assessment tax returns every year detailing your income and expenses.
Pros of registering as a sole trader
- No dues or fees to register your business
- An easy way to start a business
- Inexpensive
- Little form-filling required
- Any profit after tax is yours to keep
- Complete control over your business
Cons of registering as a sole trader
- Unlimited liability for your business, including any debts
- Personally liable if a customer sues you
- Tax planning limitations
- Limited access to finance
- Difficult to sell the business
Partnership
A partnership is when you offer services with someone you know well and is a common extension of the sole trader model, such as when a husband and wife work together to build a business. A partnership can be more flexible as there is still someone to run the company if the other person falls ill or goes on holiday.
Partners share the responsibility for a business, including any losses or bills. They also share business profits, and each pays tax on their share. An agreement needs to be made as to how liabilities, ownership and profits are split and what happens in the event one partner wants to leave. Like sole traders, each person’s only legal requirement is being registered as self-employed and puts in a separate tax return.
Pros of a partnership
- Access to additional knowledge, skills and experience
- Less of a financial burden than as a sole trader
- Little form-filling required
- Easy to get started
- Share the burden
Cons of a partnership
- Unlimited liability
- Limited access to capital
- Potential for conflict
- Cannot make decisions independently
- Profits must be shared
- Tax planning limitations
Limited Company (Ltd)
Forming a limited company means registering your business with Companies House, which can add additional credibility to your business that is not available when you are a sole trader or in a partnership. You also have more access to financial benefits as it is easier to borrow money.
Registering with Companies House means more admin and paperwork, but it is not as daunting as it sounds. You can be the sole shareholder and director in your limited company and act as a company secretary too, or you can hire employees. The main advantage of a limited company is you have less exposure to financial risk as there is a firewall between your money and the company’s, since it is a separate legal entity to the company directors.
Pros of setting up a limited company
- Minimal personal liability
- Professional status
- Tax efficiency and planning
- Separate legal identity
- Investment and lending opportunities
Cons of setting up a limited company
- More complex and time-consuming accounting
- Strict procedures and record-keeping requirements
- Annual accounts and tax returns
- Company registers and records must be made publicly available
If you need help registering your limited company with Companies House, CRO can provide you with company formation services that can help make the process simple.
Limited Liability Partnership (LLP)
LLPs are suited to professional services companies, considered the hybrid between limited companies and traditional partnerships. They offer limited liability to limited company shareholders with the tax regime and flexibility of partnerships. There is no limit to the number of partners, but two must have designated members responsible for filing annual accounts.
In an LLP, partners have reduced financial responsibility, making it an appealing option for small businesses. Like limited companies, LLPs must be registered with Companies House and have shareholders and directors. However, each LLP member counts as self-employed and must complete an annual tax return.
Pros of forming a limited liability partnership
- Minimal personal liability
- Flexibility in management
- Professional status
- Tax efficiency and planning
- Separate legal identity
- Investment and lending opportunities
Cons of forming a limited liability partnership
- Profit taxed as income
- Partners must disclose income
- More complex paperwork and documentation
If you need help or advice about setting up your own business, do not hesitate to contact CRO today. We provide a full range of company formation services with rapid turnaround and a choice of electronic or hard copy documents.
