Most small businesses set up as either sole traders, or limited companies. In this section of the guide, we look at the most commonly used business structures in the UK.
Sole Trader
To operate as a sole trader you are essentially self-employed.
The business income you generate will be counted alongside any other personal income you have, which makes the accountancy side of running a business as straightforward as it can be.
Setting up as a sole trader is an easy process, and is seen by many as a ‘hassle free’ route. There is less paperwork than the limited company route, and you will have to deal with less rules and regulations. Once you have informed HMRC of your intention to go it alone, you are on your way.
However, one downside to be aware of is if something goes wrong with your business – you run up large business debts for example, you are solely responsible financially. Your business financial affairs are not considered separately from your personal ones, and your liability is not ‘limited’ as it is under the limited company business structure
Limited Company
Many other people go down the limited company route. “Limited” means that the company’s finances are separate from your own personal money, unlike with the sole trader option.
If things goes wrong, you will only lose the money you have put in. No-one can claim against your personal assets. However, as a limited company director, you may be required to act as a guarantor for loans or credit granted for your company.
To extract funds from your limited company, 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 elect to go down the limited route. 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.
You will need to spend more time on paperwork than the sole trader route, however if you employ a decent accountant, most of the administrative burden can be taken away from you, so you can get on and run your new business.
Partnership
The Partnership structure offers another option for those who want to go into business with one or more partners, but without any of the legal and administrative confines of running a company. Like a sole tradership, a partnership has no legal status, and is simply a non-complex way of linking two or more people together in a business structure.
LLP
Finally, a Limited Liability Partnership (LLP) is similar to a limited company, with each participant having less liability for business-generated debt than they would under the ‘partnership’ route. This option involves more administration, along similar lines to being a limited company and is frequently used by firms solicitors and accountants.
Deciding upon a business structure is an important step in the start-up process, and we highly recommend you discuss your options with a local accountant or business advisor.
Depending on the nature or your business and projected turnover, a professional advisor will know which option is best for you in the long-term, both to balance out the risk and ensure that you can maximise the profits you generate. You can also read our article on choosing between each business structures.
For more information, visit our dedicated company section.
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