Business structures – sole traders and partnerships

For legal reasons and to comply with HM Customs and Revenue, you’ll need to set up the right structure for your company. The structure will depend on the nature of your business and its needs. Different structures have different implications for the tax that you pay and the accounts that you have to keep as well as your liability should there be any problems. In this article we review companies with unlimited liability and in the next article we look at limited liability companies.

Sole trader
There’s no easier way to set up in business than to become a sole trader. It involves the fewest legal requirements and the least work, and it puts you fully in control – although it offers the least personal protection. Essentially, you and your business are one and the same thing – you are personally liable
if your business is sued or owes any money, i.e. your liability is unlimited. If your company is in debt, you could end up losing your savings, assets and possibly your home, and perhaps even having to declare bankruptcy. So if you need a lot of investment to start up your business, becoming a sole trader can be risky as you will be liable to repay it from your personal wealth if necessary.

To become a sole trader, get in touch with the Inland Revenue to let them know that you’re becoming self-employed – you’ll need to complete form CWF1. You don’t need to apply for VAT registration if your business will have an annual turnover of less than £61,000. However, if you expect to earn more than this, you’ll need to gain VAT registration, charge your customers VAT and send this to the Inland Revenue.

Your profits will be considered income and taxed accordingly as you are self employed as a sole trader. You must therefore complete a self-assessment tax form every year to declare your income and expenditure. You will also need to pay National Insurance contributions on your earnings. If you want to employ other people – which you can do as a sole trader – you must set up a Pay as You Earn system and deduct income tax and National Insurance contributions from your employees.

By law you must keep records of your accounts, but this is good business practice anyway as it allows you to keep on top of your finances and ensure that you’re paying the right amount of VAT to the Inland Revenue. It also helps you to track where you stand with your creditors and debtors. Sole traders aren’t required to have their accounts audited, but it can be useful when it comes to tax inspection.

Depending on the work you do, you may need to pay business rates for the part of your house where you run your company from, and you may also need to apply to your local council for planning permission. If you decide to set up as a sole trader but use a different trading name, you must still display your own name on any business stationery.

Partnership
To all intents and purposes, setting up a partnership is the same as being a sole trader, except there are two of you sharing the risks and responsibilities. Again, you’ll both need to register as self-employed. In a partnership, the liability is also unlimited. You must be able to trust your partner as you are personally liable for not only for yourself and your own debts but also for your partner’s share in the business, including any debts that they have accumulated.

You don’t legally need a written partnership agreement. It’s wise to have one though, to safeguard both parties – even if you are friends or relatives. A solicitor will be able to help you draft an agreement that covers various areas such as sharing of profits, payment of tax, working arrangements and what will happen if one of you decides to leave. You might want an active partner with whom you share both the management and profits in the business, or a sleeping partner who does not get involved in managing the business but has a degree of liability and will get a certain share of the profits.

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