Sole Traders, Partnerships and Limited Liability Companies

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If you’re one of the people starting a new business in the new year, you’re not alone – in the UK alone 581,173 new businesses were started in 2014.  We’re not quite sure how many started in 2015, but it was probably a nearly as impressive number.  Regardless, you’re in good company.  Millions of people across the country and the world beyond are taking their futures into their own hands and starting up their own business. 

For many people, one of the earliest decisions to make is the sort of legal position in which to operate as a business.  This varies from business to business but in the UK at least, there are generally three positions that a business is formed in – Sole Traders, Partnerships and Limited Liability Companies

Sole Traders are probably the most popular form of initial startup for entrepreneurs.  By their very definition they are businesses with a single person at the helm who owns all aspects of the business.  That means they are responsible for keeping the records of income and expenses, sending the tax returns and registering for VAT should the business become successful enough to reach the VAT threshold. 

Sole trading is the preserve of many starter businesses and also of the increasing army of freelance workers across the UK.  However a sole trader can have employees just like any other business.  The key issue as a sole trader is that the business owner is wholly responsible for it.  Should it incur debts or run into other legal problems it can not remedy, the business owner is legally held accountable. 

In the UK, Sole traders are obliged to register with HMRC as self-employed to whom they are responsible for submitting the obligatory tax returns.  They can trade under their own names or, if they choose, under a business name but must include their own names and business names on any official correspondence. 

Partnerships are all the rage amongst solicitors and certain other professions where a group decide to go into business together.  The key difference between a Partnership and a Sole trader is that in partnership all the members are jointly liable for the company.  This may be ideal if you want to go into business together with other people but it also ties you to them and may have repercussions down the line. 

Like with sole-traders, Partnerships are registered through the HMRC.  Curiously, a partner doesn’t necessarily have to be a person – Limited Companies can, as recognized “legal persons” also be partners.

Limited Liability Companies differ greatly from the other two options as they set up the business as a separate entity.  This means that the business is considered liable for any debts but also owns all of the profit made.  So for example, the chief executive office is not held legally responsible if the business fails (unless of course they have broken the law in some manner).

In such a circumstance, you will probably set yourself up as a Director of the business.  In such a case, money you can personally receive from the company is most likely to come as a salary as well as any appropriate benefits which must be taxed accordingly.  You may also have shared in the company which can earn further money but only if the company is making enough money to pay dividend.

While the most common for start-ups these are by no means the only options for businesses.  Other legal formations exist for businesses in the UK and the rules are completely different in other countries.  Keeping yourself informed of your options and your obligations when setting up is the first strong step in getting your new venture off on the right foot. 

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