3) Trading Structures - Sole Trader, Limited Company, Partnership or LLP?

The two most common small business types in the UK are sole traders and limited companies.

Sole Trader

To operate as a sole trader you are essentially self-employed. Your business income will be counted alongside any existing personal income you may have, which makes the accounting side of your business about as straightforward as it can be. This proves a proposition too good to pass up for many business starters – and when you’ve got a dozen things to worry about at any one time, the last thing you’ll need on top of this in the early days is a complex accounting and administrative structure. Getting behind on your accounting is not to be recommended!

If you want to make changes to your business, the sole trader route offers much less paperwork, as well as giving you complete control over your own accounting.

The major downside is that should your venture run into financial trouble, you and you alone are responsible for sorting it out. People you owe money too can claim your personal assets such as your house. Equally, you are restricted in certain ways in terms of the name you can choose for your business.

Limited Company

In contrast, many go for the limited company option. “Limited” means that the company’s finances are separate from your own personal money, unlike with the sole trader option. If everything goes wrong, you will only lose the money you have put in – no-one can claim against your personal assets. However, as the director of a limited company, you may be required to act as a guarantor for loans or credit granted for your company.

To get money out, you must become an employee of the company and be paid either with a salary, or by taking the profits out (known as dividends). Many people starting businesses prefer to go limited. It looks more professional and has a lot less risk if you need to buy a lot of equipment or take on expensive premises, such as a shop unit.

Partnership

The Partnership structure offers yet another option for those who want to go into business with a partner or two, but without any of the legal confines of the limited company route. Unlike a limited company set-up, a partnership has no legal standing, but is just a non-complex way of linking two or more people together in a business structure.

LLP

Lastly, a Limited Liability Partnership (LLP) is similar to a normal partnership, but with each participant having less liability for business-generated debt. This option involves more administrative work, along similar lines to being a limited company and is usually used by solicitors and accountants.

All in all, you are best advised to talk through the options with an accountant or business advisor. Depending on the nature or your business and projected turnover, they will know which option is best for you in the long-term, both to balance out the risk and ensure you can maximise your profits. You can also read our article on choosing between the various business structures.

For more information on setting up a company, visit our dedicated Company section.

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