FORMING YOUR NEW BUSINESS

Sole Trader, Partnership or Private Limited company;
which legal status is best for you and your business?

Setting up your new business can be an exciting but scary time.

If you’ve finally taken the plunge to start working for yourself, you may feel overwhelmed by lots of ‘big’ decisions you suddenly need to make.

  • Should you order the portrait or the landscape business cards?
  • Do you order a laptop or a tablet?
  • Can you run your business from home alongside a toddler, baby, dog, cat and the goldfish?

However, before you get preoccupied with these decisions, choosing the right legal status for your business is one of, if not the most, important decision of all.  There are several types of legal business statuses in the UK. If you’re looking to set up a new business, the likelihood is you’ll be considering becoming a:  Sole Trader, Partnership or a Private Limited company.

Each type of business has pros and cons which can have implications on things like tax or how financially liable you are as an individual.

This step is critical to get right so seek advice from a professional or the gov.uk website if you’re unsure.

Alternatively, a dedicated team here at Business Solutions Centres reviews each of the legal statuses in more detail in their free, monthly business startup seminars held in Centres across the West Midlands.

choose your business type

Latest events

For now, here’s a quick overview of the legal statuses you could opt for, the pros and cons of each and how you’d go about setting them up.

According to the gov.uk website, the easiest way to start a business in the UK is to become a ‘Sole Trader’. This means that you personally own the business and you can choose to work alone or employ other people.

You’ll need to register for ‘self-assessment’ tax, which means you (or your accountant) will calculate your own tax.

Pros and cons of a Sole Trader

One of the main benefits of being a Sole Trader is that your accounts are relatively simple to submit each year – great if maths isn’t a strength!  Also, unlike Private Limited companies, there is no requirement to make your accounts public which means your nosey neighbour Nora down the road won’t be able to find out how much you turned over last year.

One of the main drawbacks of being a Sole Trader is that you would have unlimited liability.  Put simply, this means that there is no separate legal identity between ‘you’ as the business and ‘you’ as the individual.  Therefore, ‘you’ would be personally liable for the business’ debts, which could result in your personal assets being put at risk if things went wrong.

On the whole, a Sole Trader is the simplest form of business and gives you complete autonomy to make decisions about how it should be run.

How to do it

To become a sole trader, the gov.uk website states you must:

Find out how to set up a business as a sole trader in the UK.

In a business Partnership, you’re running a business as an individual but all of the partners share responsibility for the business.

Pros and cons of a Partnership

A Partnership fundamentally operates in a similar way to a Sole Trader so shares some of the same benefits.  In addition, working with a partner helps to spread some of the burden of running a new business – whether it financial, managerial or even tea making.  After all, two heads are better than one so they say!

However, Partnerships should not be entered into lightly.  Like Sole Traders, in a general Partnership, each partner also has unlimited personal liability. Partnership rules usually dictate that whatever debts are incurred by the business, it is the legal responsibility of ALL partners to pay them off.  Money aside, Partnerships can put an emotional strain on family and friend relationships if you know your partner(s) well.  Dave & Jane could be your best friends now, but if your Partnership doesn’t work out, they might not be quite so welcome at your annual Christmas get together next year!

Setting clear aims & objectives for the business at the start and drafting a formal partnership agreement could help to alleviate possible problems in the future.  Overall, finding a partner can be a great way of filling skills gaps you might have as an individual and can give your business a whole new dimension.

How to do it

With a business partnership you need to:

  • register for self-assessment with HMRC
  • name your business according to certain rules
  • run the business as an individual
  • share profits between partners
  • draw up a partnership agreement or deed of partnership
You can set up a Private Limited company to run your business in the UK. You must appoint people to run the company (called ‘directors’ for example, this could be you) and register (or ‘incorporate’) it with Companies House.

As a director of the company, you’re also an employee. This means that personal income and business income are separate when it comes to paying tax which means you’ll have personal income tax to pay (on money you’ve paid yourself personally from the company) as well as tax on the profits made in the company – or ‘Corporation Tax’.

Pros and cons of a Private Limited company

One of the main benefits of a Private Limited company is that it offers you limited liability as a shareholder.  Unlike Sole Trader and general Partnerships, this means that there is a separate legal identity between ‘you’ as the business and ‘you’ as the individual.  Therefore, ‘you’ would not be personally liable for the business’ debts, which in turn would protect your personal assets.  In some instances, a Director’s Guarantee would be taken to protect the lender or investor.

Some customers may also require your business to be a Private Limited company in order for you to be able to work together.  If you have prospective customers already, check sooner rather than later as this may help make the decision for you.

On the flip side, because of the more complex structure of a Private Limited company, there are more requirements when submitting your annual accounts and tax return so your administrative costs may be higher.  Staying on the topic of accounts, they will also be made public which means nosey neighbour Nora down the road would be able to find out what you might consider to be ‘private’ information about your business online.

How to do it

To set up a limited company you need to:

So, in answer to the question ‘which legal status is best for you and your business?’, the truth is, there is no right or wrong answer.  It will be governed by lots of different factors including the nature of your business, your personal circumstances or simply, your personal preference in terms of how you like to work.  If you’re still really unsure, you can even start as a Sole Trader and change legal status in the future if you need or want to.

Looking for more information? Don’t forget that Business Solutions holds free, impartial monthly business startup seminars at its dedicated business support Centres located across the West Midlands.  For more information or to book your place today, visit: http://businesssolutionscentres.co.uk/events/

Startups by legal formation

3.3 million – Sole Proprietors : 60%
1.8 million companies : 32%
421,000 ordinary partnerships : 8%

Recent Tweets

Upcoming Events

  1. Business Growth Essentials: Unpacked

    Monday 25th September at 12:00 pm - 2:00 pm
  2. Get Connected in Sandwell – Networking

    Wednesday 27th September at 7:45 am - 9:30 am

Free Local Business Support

If you’d like to find out more about setting up your own business, Business Solutions holds free, impartial monthly business start-up seminars at its dedicated business support Centres located across the West Midlands.
Alison McKenna
Alison McKennaBusiness Solutions Centres Marketing

Ali McKenna is a CIM-qualified marketer with over 9 years experience.  She is currently contracted to the University of Wolverhampton Business Solutions Centre Team as a Knowledge Transfer Development Officer.

With five physical Centres located in Wolverhampton, Hereford, Sandwell, Telford and Wyre Forest, the Business Solutions Centres team provide regional business support across a range of specialisms including finance & funding, business startup & growth, knowledge, skills & training and manufacturing, innovation & technology; all delivered through a series of regional programmes, topical seminars & workshops and one-to-one mentoring where appropriate.

Connect With Us

This blog is accurate as of information available to the writer in March 2017 and are the views of the resident Business Solutions Centres (BSCs) blogger only. BSCs accepts no responsibility for any decisions you may make on the basis of the content in this blog and advise that you always consult a professional if you are unsure.