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Sole trader or partnership?

We look at the pros and cons of two of the most common business types

Quote�Think carefully about which structure suits your particular needs before making a decision.�End Quote

In the UK today, over 2.5m businesses are sole proprietors, around a million are limited companies, while some 540,000 are partnerships. But which is best for you?

Here we'll examine the advantages and disadvantages of becoming a sole trader or partnership. You can read about the pros and cons of limited companies in another article, here.

You should think carefully about which structure suits your particular circumstances before making a decision. Choosing the wrong structure could expose you to unnecessary costs and risks, while failure to address certain practical issues may result in you falling out with your business partners or associates.

Becoming a sole trader

Establishing yourself as a sole trader is by far the easiest and cheapest way of starting up in business. To do this, you don't have to register with Companies House, which means you're already saving money compared to a limited company. It also entails far less paperwork, and National Insurance contributions are generally lower.

Being a sole trader will entitle you to all the profits from the business and you'll be taxed purely on income, less your allowable expenses.

The bad news is that, unlike a limited company, as a sole trader you are liable for all debts, so if things go wrong, assets such as your house may be sold to pay your creditors. So there's an element of risk involved. Added to which, banks may be less eager to lend you money, and sole traders sometimes have more problems than a limited company in projecting a solid business image.

Having said that, the status of sole trader suits many professions where starting up doesn't require major investment, and where a skill - such as carpentry, bricklaying or freelance services - is just as important as business acumen. It won’t stop you from employing people when you start to get busy, but it will allow you to keep a tight grip on your business and to run it as you wish.

Trading as a partnership

Partnerships provide a convenient way for two or more people to run a business, and, like sole trader status, many start-ups elect to trade as such because it's simpler than forming a limited company. For example, when it comes to tax returns and accounts, there's less paperwork, and again, unlike a limited company, you don't need to register with Companies House in order to trade.

As with sole traders, partners are self-employed, but can split the costs of running the business and spread the workload if one partner becomes ill or goes on holiday.

Quote�Trust between partners is essential, since if one partner makes an agreement, both partners are responsible.�End Quote

However, a partnership still has unlimited liability, so if it gets into financial difficulties, both partners will be equally liable for its debts. That means that if your partner runs up a debt without telling you, it’s still your problem. Trust between partners is essential, since if one partner makes an agreement with a customer or supplier, both partners are responsible for carrying it out. It therefore suits those who have known each other and perhaps worked together for a long time. A deed of partnership setting out everybody's responsibilities is highly recommended.

When it comes to tax, a partnership and a limited company offer similar advantages over sole trader status. Nevertheless, a business making profits of less than �25,000 may find that partnership status is more attractive.

To summarise, with non-limited companies:

You can withdraw money at any time - it's your money

Your profits are classed as income, and attract a lower rate of national insurance

You're 100% responsible for any debts you run up. Though there is a halfway house called a Limited Liability Partnership (LLP) which mitigates this issue to a degree

You will find it more difficult to look like a big player

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What next?

Companies House has the lowdown on everything to do with sole traders and partnerships. You can also get advice from them by calling 0870 333 3636.

It may be that neither sole trader or partnership status is right for your business. In that case, read more about forming a limited company.

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