Sole Trader, Partnership or Limited Company?
So you’ve decided you want to be your own boss and work for yourself. Now what? Are you going to be a Sole Trader, Partnership or Limited Company?
One of the first decisions to make is how you are going to trade. You can be a sole trader, form a partnership with someone else or set up a limited company. The difference between them is the administration involved, whether you are prepared to risk your own assets and how you wish to be viewed for tax purposes.
Working as a sole trader
It is very easy to establish yourself as a sole trader. You will need to register with HMRC within three months of starting up.
As a sole trader, you make your own business decisions and any profits you make are yours to keep (remember they are liable for tax). On the other hand, if you make a loss or run up debts you are personally responsible.
One key point to consider is if you do most of your work for one client, HMRC may not consider you to be self-employed and decide that you should be considered an employee of the client.
Forming a partnership
If you want to start a business with one or more other people then a partnership could be a good option. You run the business together and share the risks, decisions and profits. Many partnerships fail because partners disagree on the direction and running of the business so it’s important to be clear on our goals and principles from the start.
Planning is key to deciding issues such as how the profits will be split, who provides the finance for the start-up, who is responsible for different aspects of the operation and don’t forget to decide to what extent decisions can be made by a single partner.
The planning will help you form a partnership agreement which will be vital to the success of the partnership.
Partners are usually taxed as self-employed so you will need to register with HMRC within three months of starting up. Each year you will need to complete a partnership tax return as well as individual returns for each partner.
Setting up a limited company
Operating as a limited company is a way to safeguard your personal assets if the business gets into financial trouble as it is legally separate from its owners (shareholders) and managers.
Limited companies need to be set up and registered with Companies House who set out strict guidelines for the administration and financial reporting. Each year annual accounts need to be sent to Companies House and a company tax return must be filed with HMRC. The administration costs are therefore higher for a limited company.
Unlike operating as a sole trader where any profits are yours to keep money can only be taken out of a limited company through PAYE and dividends.