If you're thinking of setting up a new business, or if you already own or run a business, the type of ownership structure that you choose is important to get right. Our Accountancy Team are often asked to explain the difference between sole traders, partnerships and limited companies. We asked Paul McGrath, who heads up Chesterton House Accounting Services LLP, to explain further.
Before we go into the detail of what happens in various day-to-day situations for each business structure, let's explain a bit about what sole traders, partnerships and limited companies are. We've created the helpful infographic below to summarise the differences that might help you choose the right business structure.
It's worth noting that as a sole trader, you operate your business solely as an individual and are classed as self-employed, and that a partnership is similar to a sole trader, except it can have multiple owners. This is why they have been classed together below.
Choosing the right structure for your business is a matter of weighing up the advantages and disadvantages of each option based on your own circumstances. As a general rule, it can be more expensive to operate a limited company and you will need to keep good records because of the extra reporting requirements, including the need for annual accounts. However as your income and profits grow, a limited company structure offers more opportunity for tax planning, as well as the reassurance that you won't be personally sued if things go sour - although you do have a range of duties and obligations you'll need to fulfil to keep this protection.
As always, good advice from someone who has sound knowledge of these differences, as well as the ability to understand your own circumstances and aspirations, can be worth its weight in gold. Our team has lots of experience working with businesses large and small, and we will be delighted to help.
If you have any questions or concerns about which business structure would be best suited to your wants and needs, please feel free to get in touch with us.