Self-employment: What Type of Business Can I Set Up?

Choose a Legal Structure for a New Business

In the UK and most countries you must choose a business structure when you start a business. The structure you choose will define your legal responsibilities, and include items such as:

• The paperwork you must fill in to get started.
• The taxes you’ll have to manage and pay.
• How you can personally take the profit your business makes.
• Your personal responsibilities if your business makes a loss.

So, as the type of business you set up will determine the legal requirements you will need to comply with, it is worth spending a few hours and possibly even taking legal advice before committing your self.

Sole Trader

A sole trader or sole proprietorship or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business.

This is the option you will probably choose if you want to run your own business from home for example. You keep all of the profits you make, after paying the required taxes of course.

The downside is you have unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor’s. So you could lose your house and everything else if your business went bankrupt.

Although the term sole trader infers that you will be working alone it doesn’t mean that you can’t employ people but rather you are solely responsible for the business. As a sole trader you may use a trade name or business name other than your legal name.

The registration of your business as a sole trader, you will need to register with HMRC for self-assessment and start paying your Class 2 NI contributions. As a sole trader no-one can stop your trading under your own name but if you incorporate your name in a longer trading title, i.e., Tom Smith Galaxy Class Star Ships, you need to check that no-one else is using the same name.

Sole Trader Advantages

• Relatively easy to organize.
• Costs nothing to set-up in the way of legal requirements.
• Generally needs only small amounts of capital to start and run.
• Permits a high degree of flexibility.
• You are the sole boss of the business.
• Due to the owner’s unlimited liability, some creditors are more willing to extend credit.
• The owner receives all the profit of the business.
• Less red tape.
• If you feel like taking a day off, you can.
• Improved customer service. Sole traders can offer a more personalised approach to their customers.

Sole Trader Disadvantages

• Raising capital as a sole trader can be difficult.
• You must be a self-starter.
• The enterprise may be crippled or terminated if the owner becomes ill.
• Since the business is the same legal entity as the proprietor, it ceases to exist upon the proprietor’s death.
• Has limited resources.
• Banks are reluctant to grant loans to sole traders.
• High mortality rate.
• Unlimited liability for business debts.
• Creditors may force the sale of the proprietor’s personal property as well as their business property to satisfy their claim.
• Can be difficult to pass the business on to family in the event fo death.
• Can be difficult to sell the business as a new owner must typically accept all current liabilities of the business.

Partnership

A partnership is an association of two or more people who cooperate to advance their mutual interests. The business is owned by two or more people who are all responsible for funding the investment and start-up of the company. They are also liable for any losses the company may make.

All business profits are shared by the partners (not necessarily equally) and each partner pays tax and National Insurance on their share of the profit.

A partner doesn’t necessarily have to be a person it can be a limited company which counts as a ‘legal person’. The company must choose a nominated partner to take responsibility for the book keeping and tax returns.

Warning: Always form a partnership around a partnership agreement. A partnership agreement should cover how the business will be run and how problems will be resolved (should they arise).

• Click the Partnership Act 1890, to see more information.

Limited Company

A limited company is a private company in which the liability of members or subscribers of the company is limited to what they have invested or guaranteed to the company. Limited companies may be limited by shares or by guarantee. This should not be confused with a Public Limited Company (PLC).

• Who may become a member of a private limited company is restricted by law and by the company’s rules.

Legally, this form of business separates the organisation from the people running it. Any profits made are owned by the company and not the people running it. After paying Corporation Tax etc., the company can share its profits as it see fit.

The limited company (organisation) has members who own a share of the company. These shares can be sold to friends and family members. A member of the company are only responsible for the value of their investment in the business. This means that if the business acquires massive amounts of debt, the members are not liable to pay the sum of the debt, just their share of the investment.

Registration of a limited company, means incorporation. This can be done for as little as £100 within a matter of hours.

Be warned. Once registered as a limited company, even if you haven’t started trading, you are still required to submit an annual return. Failure to do so could end up with fines and an action to have the company struck off.

All Business Types

All business should enquire about the need to register for VAT with HMRC. If you’re going to employ anyone, it is essential that you register with HMRC because tax and NI have to be accounted for in real time now, not monthly or annually.

For more information on company types see: GOV.UK – Choose a Legal Structure for a New Business .