Sole Trader, Partnership, LLP or Limited Company

This blog gives you an outline of the different business structures you can trade through. The business concept is not necessary. So, you move between them. It is fairly simple for a sole trader to take on a partner and become a partnership and form a partnership to become a Limited Company.

There are however more complications with changing from a Limited Company to a sole trader or partnership.

Sole Trader

This is the simplest form of business to start where you carry on business on your account. You are liable to income tax and Class 4 National Insurance on your profits. Hire people such as your parents, as long as they are paying for the real value of the work they do.

Partnership

A partnership is two or more people carrying on business together to make a profit, although partnerships can also be formed between companies, or between an individual and a company.

The partners in a general partnership are all joint and severally liable for partnership debts, although this does not apply to personal tax bills based on partnership profits.

It is advisable to have a partnership agreement to document the business arrangement between the partners, including how profits will be shared and how partners will join and leave the partnership.

Even a husband and wife partnership should have a written partnership agreement. It intends to demonstrate the Revenue. That, all parties engage fully in the company and have the right to share the profits.

Limited Company

A limited company is a separate legal entity from its owners. These are the basic facts…

1. The business is owned by a limited company. Not you.
2. The company must have at least one shareholder.
3. It must also have at least one director. There is no longer a requirement for private companies to have a company secretary.
4. The shareholders do not have to be directors. Directors will be treated as employees of the company. So, they do not have to draw a salary from the company.
5. If you are the only shareholder, you will have sole ownership of the company and are likely to also be the director who runs it.
6. The company pays corporation tax on its profits.
7. The company will be governed by company law.

Advantages of Using a Limited Company

1. A Limited Company may appear more credible and substantial although, in reality, this is not necessarily the case.
2. The liability of its shareholders is limited to the amount of the share capital issued and so offers protection to the shareholders’ assets. In the event of company failure and not being able to pay its creditors, your assets are protected.
   However, banks, landlords, and others will often require personal guarantees from the shareholders or directors when dealing with small limited companies.
3. A Limited Company has better-borrowing potential than an unincorporated business as it can use current assets as security by creating a floating charge over its assets.
4. You can use shares to enable different people to hold different proportions of ownership of the business that they can pass on to the next generation.
5. You can have different classes of shares with different rights, such as non-voting shares for someone who wants to invest some money into the company but doesn’t wish to take part in the management.
6. Having a limited company can create significant tax advantages by having profits taxed at Corporation Tax rates which are a lot lower than the higher rates of personal tax.
   However, when the funds are extracted from the company extra tax or national insurance charges may arise.

Disadvantages of Using a Limited Company

1. 1. Your annual accounts have to be filed at Companies House and are available for public inspection as is other information about the company.
2. Directors are personally subject to regulations and can be fined or found guilty of a criminal offense for failing to comply.
3. A company is more complicated to wind up.
4. Generally involves higher accountancy fees as there is paperwork to deal with.
5. The organization reports a loss cannot be measured against the shareholder’s earnings

Limited Liability Partnership (LLP)

LLPs are classified for tax purposes as a regular partnership with Limited Liability protection for partnership members.

An LLP is a separate legal entity capable of claiming Sue’s contracts. Which operates and pays on its behalf. With normal partnerships, every partner has to be a party to certain documents and litigation.

Floating charges are an issue on its behalf for its properties. Which normal partnerships can not do? As with Limited Companies, the LLP must file annual accounts at Companies House together with certain other information.

Conclusion

The best business structures are those that are as flexible as possible. A new business is projected to suffer losses in the first few years. Which will operate as a venture or as a sole trader to suffer the most use of such losses? There may be commercial pressures to operate as a limited company in certain sectors.

It is possible to split a business into two; one part running as a Limited Company and one as a sole trader/partnership to get the best of both structures. One needs to look carefully at the results of a VAT break. You can even structure the business as a partnership but with one of the partners being a limited company.

 

Disclaimer: The information about Sole Trader, Partnership, LLP or Limited Company, provided in this article including text and graphics. It does not intend to disregard any of the professional advice.