Types of legal entities
Sole Trader
Also known as a sole proprietor, a sole trader is a business ran by an individual. You can also have employees, but from a legal perspective, there is no separation of the person and the business. The owner keeps all the profits, but is responsible for all the debts and liabilities.
General Partnership
When there is more than one entity, but the company is non-limited, a general partnership is an agreement between two or more owners. As default they are equal proprietors with equal legal liability and debt. In the event of liquidation, personal assets can be used to pay creditors.
Advantages
Setting up as a sole trader is easy. The only requirements to get started is to register for a unique tax reference, UTR, for the self-assessment.
With sole traders and general partnerships, all profits go to the owners. The sole trader is classed as self-employed, which for the accounting, means you must submit a tax return each year. This is done via a self-assessment which needs to be completed by January of the following year.
The bookkeeping is simpler, as it is based on income, minus operation costs. You can submit your own records to a tax advisor, or directly to HMRC.
There is no need to use PAYE and payroll, if you don’t have employees. Giving more control on the revenue generated.
Disadvantages
All debt is linked the owner; any and all assets can be liable if the company cannot pay its creditors.
Sole traders on average work more hours as they take on many responsibilities in the business.
Raising finance and funding is limited; most business loans and funding are not available to sole traders.
Ltd – Private Limited Company
The basic set up for a Ltd company is that shares are given to private shareholders and not to the general public. Usually, one will hold majority shares, or in the case of one director, they will hold one share at 100% ownership. All liability is with the company as it acts as a separate entity.
LLP – Limited liability partnership
Like a Private Limited Company, an LLP operates as a separate entity to the members. The partners run the business directly, and are not responsible personally for any financial liability or misconduct.
Advantages
Ltd and LLP companies can be more tax efficient. The pay can be a combination of salary and dividends. Dividends have a lower tax threshold allowing the owner to keep more of the money.
As directors do not take on personal liability for the company, they can leave or sell the business at any point. The losses and debts are linked to the company as it acts as an entity.
Businesses that are Ltd, are seen better by other businesses. Being Ltd can open doors with other businesses or contractors.
Disadvantages
The director must provide annual accounts for the company, and will be publicly available on Companies House. Increasing the need for small business bookkeeping firms and financial accounting.
More admin means more expenses, either person time, or paying for external accounting services. Limited companies cost more to run than a sole trader. If a limited company makes a profit between £20,000 and £30,000 it can work out more tax efficient to be Ltd, but not always.
Hiring staff comes with more financial costs. They must be paid through PAYE using either internal or external payroll companies. The employees will also have more rights, such as holiday, sick pay and pension schemes.