Company Formation

Limited, Partnership or Sole Trader

One of the most frequent questions asked by someone starting off in business is “Should we be a limited company or not?” which trading style. Although the answer depends on particular circumstances and I would encourage everyone to seek professional guidance, I thought a few particular notes would be useful. The comments below are general and professional advice should always be sought.

Sole Trader

This is the “default”, if we start trading or conducting business without setting anything else up we are a sole trader.

Advantages of being a Sole Trader

  • Easy to set up (just start) – but inform HMRC
  • Easy to stop
  • Less cost relating to private use of car or other assets owned by business

Disadvantages of being a Sole Trader

  • Unlimited liability
    • if you go bust you could lose all your assets (home, car etc)
    • you could be personally sued if things go wrong
  • Money is earned by you when your business earns the money
  • Self Employed National Insurance is paid
  • More difficult to pass on or sell business in future

Normal Partnerships

Advantages of being a Partnerships

  • Easy to set up (just start –written partnership agreement recommended but not mandatory, and also advise HMRC)
  • Easy to stop – if all partners agree
  • Less cost relating to private use of car owned by business
  • Allows Business to have extra staff (ie other partners) without them being employees
  • Can make spouse partner and use tax allowance

Disadvantages of being a Partnership

  • Needs at least two partners
  • Unlimited liability
    • if you go bust you could lose all your assets (home car etc)
    • you could be personally sued if things go wrong
  • Money is earned by you when your business earns the money
  • Self Employed National Insurance is paid
  • Agreeing at end of year which partner gets what
  • What happens when one partner wants to move on
  • Additional penalties per partner for late Partnership Tax Returns on top of SA returns.

Limited Company

Advantages of being a Limited Company

  • One person can establish
  • Limited liability (beware a “directors guarantee” can remove this)
  • Income not earned by owners or directors/shareholders until company pays it to them
  • Use of directors salary rules can reduce National Insurance costs
  • Business Profits can be distributed by dividends
  • Easier use of Spouses tax allowance

Disadvantages of being a Limited Company

  • Need to be set up at companies house
  • More Reporting requirements (although small company exception drastically reduces this)
  • Can have horrendous Benefit in Kind on use of business owned vehicles etc

Limited Liability Partnerships

In the past these have been mainly Accountants and Lawyers but I have noticed recently other business areas using this model, for example marketing and leisure companies. Advantages as partnerships but with additional …

  • Advantage … Limited liability
  • Disadvantage … Needs to be registered at companies house and additional reporting requirements

Still not sure of which trading style? call us today on 01246 233108 or view www.innspiredaccountancy.co.uk