Sole trader, partnership, limited liability partnership, or limited company – before you start your business, you'll need to choose a business model.
But which do you choose?
There are benefits and disadvantages to each. Each one is appropriate for different business types, and choosing the right one for your business can be a huge factor in how your business performs – so it's important to get right from the start.
But if you haven’t a clue, this guide will help you understand their key features and how each one works.
What's a sole trader business?
A sole trader is the sole owner of the business and owns the assets of the business in their own right.
Examples of a sole trader:
- Evalina, the coffee shop owner
- Dorota, the dog-walker
- Alex, a corner shop owner
- Caroline, a graphic designer.
Any legal responsibilities?
A sole trader's legal responsibilities include paying income tax and class 2 and 4 national insurance contributions and complying with any relevant regulations (for example, complying with data protection or food safety laws).
If you'd like more information, check out our guide on tax for small businesses
Who's the key decision maker?
The sole trader manages the business and makes the key decisions within the business. They may decide to hire a consultant to help them make business decisions; however, it is them, the sole trader themselves, that has final say over how the business is run.
Who's liable for debts?
If the business incurs any debts at all, it's the sole trader themselves who are responsible, or liable, to pay them.
How's finance typically offered?
Because of the personal liability for any debts in this arrangement, it’s often not easy to get finance as a sole trader. Some businesses may be able to obtain grants or awards, but the amounts tend to be relatively small.
The most common means of obtaining extra funds is generally by way of a bank overdraft and, for larger sums, bank loans. These can be provided on quite inflexible terms and often require security in the form of a fixed charge over an asset owned by a sole trader or the use of a personal guarantee. So, there can be a fair amount of risk involved in taking on financing commitments.
What details need to be public?
A sole trader’s name and business address must be visible on business letters, invoices, receipts, payment demands and written orders.
Advantages of being a sole trader
The sole trader’s decision-making ability isn’t diluted or affected by anyone else.
No setup costs (i.e. there's no company formation fee to pay), and there aren't any ongoing associated fees such as filing of annual returns, bookkeeping.
A sole trader doesn’t have to prepare formal annual accounts like a limited company has to. This keeps their accounts private rather than public. A sole trader just needs to submit a tax return once a year.
Disadvantages of being a sole trader
- The business debts fall entirely on the sole trader personally, so their personal assets and possessions are potentially at risk.
- It’s not easy to get finance as a sole trader.
- Because of the personal liability, some customers or companies don't like trading with a sole trader and prefer working with a limited company.
- You're likely to pay more personal tax as a sole trader than as a limited company.
Want to access this guide?
Already have a Farillio account? SIGN IN
Get unlimited access to 100s of legal resources by signing up to Farillio today.
- Manage your legal documents online
- Well written legal templates by our partners
- Guides to help you understand law
- Legal help available every step of the way