Legal entities
There are several legal entities that you can choose to run your business under, each having their own advantages and disadvantages. The following are brief descriptions of what they are and who they may be more suitable to.
Sole trader
The most simple of legal business entities, being a sole trader means less paperwork and less hassle, with the advantage of providing you with more time to invest in the work that makes you money. As a sole trader, your only responsibilities regarding tax are to register with HMRC within three months of starting to trade and to complete a tax return each year.
As a sole trader, you pay your tax at the end of each year, unlike working as an employee where you pay tax each time you receive payment from your employer. There is also some leverage given by the tax man, as you are given from 6th April to 31st January to make your payment. This is beneficial for those who plan in advance, but can cause a bit of a problem for those who leave everything to the last minute, if there is a cash flow problem.
Partnership
Partnerships are a great way to combine the skills and assets of multiple people from different backgrounds to enable higher chances of success for a business. An example of this would be someone who has a good background in marketing and business management working with someone who has good technical expertise—allowing them to create a superior product that has the backing of a well-executed marketing strategy and business structure, of which the business wouldn't have succeeded without the contribution of both parties. Good examples of partnership successes have included Steve Jobs (the business brains) and Steve Wozniak (the technical brains) who founded Apple, while Sergey Brin and Larry Page co-founded Google.
Although there are many advantages to setting up a business through a partnership, there are also several major disadvantages:
Success requires both parties to contribute their share to the partnership. Many partnerships fail because one or more parties take advantage of the other(s) by not investing the effort that is expected of them
Opportunities can be missed when a decision or authorization is required by a partner who isn't available or contactable—unlike a sole trader, who makes decisions and reacts straight away
Disagreements and disputes between business partners can be damaging to the business and in the worst case scenarios can lead to their destruction
To avoid such problems, planning and precautions should be put into place that protect the interests of all involved:
Creation of a formal contract between all partners that details all terms of the partnership, including percentage of ownership, delegation of responsibilities and the procedure for termination of the partnership
Monitoring of the partnership activities to ensure that all members are fulfilling their obligations
A set procedure for decision making that identifies who has authority to make decisions for different types of situations and ensuring that all parties are contactable as much as realistically possible
Limited company
Unlike setting up as a sole trader or partnership, trading as a limited company requires much more effort to set up and trade—as all accounts need to be recorded in a specific format and submitted to Companies House for their approval. In short, setting up as a limited company results in much more paperwork which results in more distractions from your core business activities and higher admin/accountancy fees.
There are, however, several advantages to setting up limited company:
The business becomes a separate entity from yourself, meaning that any debts are owned by the business. Should the business run into financial difficulties, any debts are separate to yourself—meaning that you wont be forced to sell assets like your house to settle the business debts. Keep in mind that company directors can still be held responsible for company debts should they be proven to have allowed the company to continue trading while insolvent, or for any personal guarantees given
There are certain tax advantages to benefit from being a registered company once your profits reach a certain level. Your accountant will be able to advise you on this
