A How To: The Differences Between Sole Trader, Limited and Partnerships
Whether you’re setting up a side-hustle or a full-time business, one of the first things you will need to decide on is which type of business you’re forming.
There are many different forms of businesses that you could set up, but the three types we see most commonly are Sole Trader, Limited Companies and Partnerships.
Certain factors will help make the decision about which type of business you should form, including what the nature of your business is, where you work, whether there will be one or more directors, and whether you plan on hiring people to help you in the future.
We commonly hear people asking whether they should set up a Sole Trader business at the beginning of their journey, so where better to begin?
What is a Sole Trader?
As a Sole Trader, you run your own business as an individual and are self-employed.
Only one individual can operate a Sole Trader, so if you’re planning on setting up with a business partner, a Sole Trader isn’t the right option for you! In that case, we would recommend taking a look at a Partnership (mentioned later on) which is usually a good method for two or more Sole Traders.
Technically speaking, a Sole Trader is not a company, as you are not registered as a company with Companies House, but it is a business none-the-less.
What are the key things to know about a Sole Trader?
Arguably, the biggest thing to know about a Sole Trader is that you and the business are collated. You, as an individual, get to keep all of your business’s profits (after tax), and you are responsible for any losses your business makes. There is no distinction between you and the business, so none of your personal assets are protected, which can be seen as a risk should things, unfortunately, take a downturn.
As a Sole Trader, any tax you need to pay on your business profits is paid via the self-assessment tax return system. The deadline for paying your tax is due on the 31st of January, after the end of the previous tax year, i.e. you will pay the tax for your 2018/2019 financial year (6th April 2018 to 5th April 2019) on 31st January 2020.
Sole Traders are not legally required to file annual accounts, but it’s essential that you keep a record of business expenses and income, for when it comes to filling in your Tax Return.
Many people assume that as a Sole Trader you cannot employ staff to help you, when in fact Sole Traders can employ staff and have the same responsibilities to their team as a Limited Company or others would have. This means that you have to supply the right holiday pay, pension contributions, maternity pay and more to your employees.
We often see Sole Traders transferring to Limited Companies, often shortened to Ltd, as they grow and the business has new needs that a Limited Company can provide for.
What is a Limited Company?
A Limited Company is its own legal identity and can be Limited either by shares or guarantee. This means that unlike a Sole Trader, your personal assets are protected, should the business not go as planned.
Limited Companies must have at least one director, who must be aged 16 or over, and not be disqualified from being a director. Directors are legally responsible for the running of the company.
What are the key things to know about a Limited Company?
In addition to your annual Personal Tax Return as a Director, Limited Companies are also responsible for paying any tax on dividends you received from the company, as well as the tax deducted from directors’ salaries and employees wages, via Pay As You Earn (PAYE).
On top of these taxes, both employer’s and employee’s National Insurance (NI) is payable on salaries, wages and bonuses.
Corporation Tax is also charged at 19% to Limited Companies on an annual basis, nine months after the year end and a Company Tax Return must be filed 12 months after the year-end. To calculate the Corporation Tax, a Limited Company must prepare and file annual accounts with HMRC.
Further responsibilities of Limited Companies include filing a Confirmation Statement with Companies House annually, which includes up to date information about the directors, shareholders and registered office.
What is a Partnership?
Generally speaking, a Partnership is where you and your partner (or partners) share the responsibility of the business, along with the business’s profits, and each partner pays tax on their share. Essentially, a Partnership is like having multiple Sole Traders together, where the same rules apply as in a Sole Trader business, but having two or more are working together makes a Partnership.
A partner in business doesn’t have to be an actual person either. For example, a limited company counts as a ‘legal person’ and can be a partner.
When we think of a Partnership, three types of businesses come to mind: a General Partnership, a Limited Partnership, and a Limited Liability Partnership.
A General Partnership is similar to a Sole Trader, where the partner's personal assets are unprotected.
What are the key things to know about a Limited Partnership?
In setting up a Limited Partnership, there must be at least one ‘general partner’ and one ‘limited partner’, each of which will have different responsibilities and liabilities for the business. You cannot be a general partner and a limited partner at the same time.
As a limited partner you:
Contribute an amount of money or property to the business
Are only liable for debts up to the amount you’ve contributed
Can’t manage the business or remove your original contribution
Must be registered for Self Assessment with HMRC
As a general partner you:
Are liable for any debts the business can’t pay
Control and manage the business
Must register the company with Companies House
Must register the company for Self Assessment with HMRC
Must register yourself for Self Assessment with HMRC
What are the key things to know about a Limited Liability Partnership?
In setting up a Limited Liability Partnership (also known as LLP), there are two or more designated members, and you can have any number of ordinary members. A member is a person or a company, known as a ‘corporate member’.
An LLP must have at least two ‘designated members’, an LLP agreement must be drawn up to say how the LLP will be run, and the company must be registered with Companies House.
As an ordinary member you:
Must carry out the duties and legal responsibilities laid out in the LLP agreement
Must register for Self Assessment with HMRC
As a designated member you:
Have more responsibility, e.g. keeping company accounts
Must appoint an auditor if needed
Must prepare, sign and send annual accounts to Companies House
Must submit a Confirmation Statement to Companies House annually
Must register the business for Self Assessment with HMRC
Must register yourself for Self Assessment with HMRC
So, what’s next?
Sometimes, the convenience of knowing your new business has been registered correctly is great value for peace of mind. In those cases, here at Cone we can perform Company incorporations and provide you with all the documentation afterwards. We can also help you get started with certain banks as well.
About the author
Evie Cox is the Virtual Office Manager here at Cone. She loves wearing many hats in her role, with day to day jobs ranging from general office admin, developing graphic content for web and social media, and writing the odd blog here and there.
Evie loves yoga and meditation, being beside the sea, and shares her home office with her DaxiJack pup Rosie!