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Forming a Business: An Overview of Business Structures
What is a sole trader or partnership?
Sole traders and partnerships share many features in common. In fact, the only significant difference between them is ownership and liability is split amongst multiple people in a partnership situation.
Here is an overview of the key features:
- Personal liability. Unlike a limited company, you (and any partners) are personally liable for all the business’ debts. So if your business goes under, you will be forced to pay – and as there is no limit to your liability, you may well be made be bankrupt. In a partnership, you are all equally liable for the company’s debts; and if one partner cannot fulfil their obligations the others may have to pay his or her share.
- Personal ownership. As a sole trader, you personally own all the assets belonging to the business. In a partnership, ownership is split along the lines drawn up in the Partnership Agreement (see below).
- Income tax. You have to pay personal income tax on any profits the business makes – even if you do not personally draw any takings from the business.
- National Insurance Liability. You have to pay your own National Insurance, and your bill may well be lower than if you were an employee of a limited company; ask your financial adviser for help with this.
- Partnership Agreement. In a partnership, you normally agree how the business is run in a formal document. This will cover matters including how you add or remove partners, how and when you take holidays and so on.
What is a Limited Liability Partnership?
In addition to the ‘classic’ partnership situation, there is another kind of structure available, known as a ‘limited liability partnership’ (or LLP for short). This limits your personal liability in much the same way as a registered company. The key features:
- Registration at Companies House. As it is a legal entity in itself, you must go through the Companies House registration process to register an LLP, in much the same way as a limited company.
- Flexibility. Partnerships are somewhat more flexible in their business structure than limited companies, but you still gain the benefit of limiting your personal liability.
- Income tax. Members of an LLP are considered self-employed, and pay income tax in the same way as if they were in a regular partnership.
- Red tape. Like registered companies, LLPs are subject to a number of filing and red tape requirements, such as the requirement to prepare and file annual accounts.
- Trade associations. Some trade associations may have special conditions that apply when you register an LLP in the sector; check with your own trade association for guidance.