Sole Trader, Partnership or LLP: Which is Right for Me?
Taking the plunge and setting up your own business is both an exciting and daunting time. You may think that you’re set once you’ve established your product or service, business name and funding, but that’s not all you have to consider.
You must also decide on the structure of your business. This will determine your reporting requirements to HM Revenue & Customs (HMRC) and the Registrar of Companies, the manner in which you extract profits from your business, your personal liabilities and responsibilities and, importantly, the rate of tax that is paid on your business profits.
In this post, we’ll discuss the different business structures so that you can decide what is best for you.
A sole trader is someone who is self-employed and runs their own business in their own name (or business name). Unlike a limited company structure, sole traders do not have the luxury of limited liability in case something goes wrong, which means you are solely responsible for the business and its debts. If there are any business losses, these must be paid out of your own pocket. However, the advantage of being a sole trader is that after you’ve paid tax you can keep all business profits.
These businesses should be registered with HMRC as soon as possible, and no later than 5th October after the end of the tax year of commencement.
A partnership is two or more people who form a business and share responsibility for it. The profits are split between each partner, and each person is responsible for paying their share of tax. This also means that the liabilities are shared. In other words, each partner could be held individually liable for the debt of the partnership.
Limited Liability Partnership
A limited liability partnership (LLP) is a business run by two or more people. The partners are not personally liable for debts the business cannot pay as the liability is limited to the amount of money they invest in the business. In this structure, there is the flexibility of what and how much each partner contributes to the business, and there can be an unlimited number of business partners.
However, some LLPs do not require partners to consult the others when business decisions are made. An LLP Agreement can cause conflict, so it’s important to go into business with people who have the same vision as you do.
A limited company is an organisation that is set up to run a business. All finances are kept separate from your personal finances, and profits are distributed to shareholders as dividends after corporation tax. Generally, there are two types of limited companies:
- Public Limited Company (PLC) – Shares can be bought and sold through a stock exchange.
- Private Limited Company (Ltd) – Cannot buy and sell shares through a stock exchange.
Registering as a limited company protects your company name and restricts others from using the same title. However, bookkeeping and accounting for a limited company is more complex and requires you to keep accurate ongoing records.
Structured for success
Do you need help finding the right structure for your business and keeping accurate accounts? UWM Accountants can help. Our accounting experts in Leeds make managing your business finances straightforward and easy. We offer valuable advice and accounting services so that you can focus on running and growing your business.
Give us a call today to talk more about your company and how we can help.