Taking your business from its initial concept to a successful reality is a multifaceted process. It can seem like there’s an endless to-do list of considerations throughout the entire journey, with each step as important as the next.
One key decision in particular, is how you plan to trade as a business entity. With a number of trading options to explore, choosing just one may seem daunting at first. It doesn’t have to be complicated though, check out our overview of each trading option, as well as our free guide: Running a Limited Company.
There are four trading options to choose from: sole trader, partnership, limited liability partnership (LLP), and limited liability company. Each have different tax treatments that may influence decision making; however, the defining influence behind choosing your business’ structure should be risk. Whether this is any risk presented by the business itself, or the level of risk that you’re prepared to take on as an individual, it should be a fundamental part of exploring trading options.
Sole trader
If you’re starting your own business, then operating as a sole trader may seem like the most obvious choice. This just means that you run your business as an individual, working for yourself. To put it simply, you are the business. On the one hand, this is great, as it means you’re able to keep all business profits once tax has been deducted and maintain full control over how your business operates. On the other hand, as the name implies, you’re solely responsible for all your business’ debts and liabilities, which may not always be the best idea!
Partnership
If you’re going into business with at least one other person, then it’s likely that you’ll form a partnership. This allows you to share responsibility for the business across all partners, meaning that any losses and bills are split. The business profits are shared, and each partner pays tax on their share. Operating as a partnership allows a level of flexibility that may not be achieved as a limited company, where approval would be required from directors/shareholders.
Limited Liability Partnership (LLP)
Similar to an ordinary partnership, LLPs can be incorporated by two or more members (known as corporate members), who are either people or companies. Each member is still required to pay tax on their share of the profits but isn’t personally liable for debts. Instead, each partner’s liability is determined by the amount of money they invest in the company. An LLP requires partners to set out an LLP agreement, which defines how profit shares and responsibilities are divided. This allows partners to take on different roles, spreading responsibilities based upon individual expertise.
Limited Company
This allows for more separation between you and your business, limiting your liability as the owner. The company acts as a legal structure, so that liability is limited to an individual’s stake in the company, in terms of investment. A limited company is ideal if your business brings a level of risk with it that may not be coverable by your insurance.
Choosing a trading option isn’t a quick decision, and we’d encourage you to consider what each would truly mean for your business. Check out our free guide for more information about exploring your trading options, and more particularly running a limited company:
For further guidance, please don’t hesitate to get in touch with Fabrice Legris at fabricelegris@fiandertovell.co.uk.