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com/differences-between-sole-trader-partnership-ltd-and-plc/

What is a Sole Trader?

A sole trader is someone that sets up and owns their own business; they reap the rewards and
benefits but also have unlimited liability. Unlimited liability means that the sole trader is
personally responsible for all of the businesses liabilities and losses.

How to set up a Sole Trader business?

The set-up of a sole trader business is the easiest, cheapest and simplest method out of all of
the business structures available. You would need to register your sole trader business with
HMRC by the 5th October in your business’s second tax year of trading, if you don’t you could
be fined.

In terms of choosing a name for your business, you can use your personal name, or
alternatively, you can choose a business name. However, you need to be aware that a sole
trader name cannot include the following:

 Ltd, Limited, Limited Liability Partnership, PLC or Public Limited Company

 Offensive language

 An existing trademark

HMRC have a list of sensitive words and expressions that you would need to take into
consideration before choosing a name, see here for their current list.

How am I taxed as a Sole Trader?

As a Sole Trader, you would need to complete a self-assessment tax return on an annual basis.
The tax year runs from the 6th April to the 5th April, the filing and payment deadline is the
31st January following the end of the tax year.

A Sole Trader would need to keep a record of all income, expenses and assets in order to
calculate the profit to declare on the self-assessment, along with any other income received
during the tax year. The profit would be at the standard personal tax rates; personal allowance
being deducted first and then tax at 20% in the basic rate tax bracket (2020/2021) and 40% in
the higher rate tax bracket (2020/2021).

There are two classes of National Insurance that a sole trader would have to pay:

 Class 2 NIC – If a sole trader earns profit in excess of £6,475 (2020/21) during a tax
year, then they would need to pay a rate of £3.05 per week (2020/21) through the
self-assessment, this equates to £158.60 per annum.

 Class 4 NIC  –  If the profit for a sole trader is in excess of £8,632 during a tax year, then
class 4 NI would be payable, this is broken down into 2 thresholds shown below:

 9% on profits between £8,632 to £50,000

 2% on profits over £50,000

Advantages and Disadvantages of setting up as a Sole Trader

Advantages Disadvantages

Complete control over how you run and

Unlimited liability – Putting your personal
manage your business. You are in charge of
property and possessions at risk
decision making.

Lack of employee benefits – As you are

Protected by HMRC’s taxpayer confidentiality working and managing your own business, if
rules you take a sick day or want a 2-week holiday,
you won’t get paid.

Commitment – To make your business

Cheaper costs – No formation fees and
successful, you may have to put in extra-long
cheaper options with Accountancy services
hours/weeks.

Less admin – No company accounts or

corporation tax returns to complete for HMRC. Irregular income – You’ll be paying the running
No additional paperwork to complete year on costs of your business, regardless of income.
year for Companies House

100% of the profits are taxed

Image – some companies won’t engage with a

sole trader

What is a Partnership?

A partnership is a type of business structure  whereby 2 or more people pool together their
investment and knowledge to create a business. Similar to a sole trader, each partner would
reap the benefits and rewards of the business but also be responsible for liabilities and losses,
including those of Limited partners (investors that have Limited Liability and do not get
involved in the management of the business).

There are three types of partnerships to consider:

 General Partnership – All partners are involved in the day-to-day decisions and
running of the business. The partners are personally responsible for the liabilities of
the business and share profits based on their share %.

 Limited Partnership (LP) – Some partners will be general partners as per the above
and the other partners will be Limited partners which mean their personal possessions
are protected from the company and General Partners actions.

 Limited Liability Partnership (LLP) – All partners are protected by the Limited Liability
status, therefore not putting their personal possessions at risk should creditors be
seeking payments.

How to set up a Partnership?

To set up a General Partnership, you will need to select a name for the business (the same
business naming rules apply as sole traders) and choose a nominated partner. The nominated
partner is responsible for sending partnership tax returns to HMRC.
Similar to a sole trader, a partnership must be registered with HMRC by the 5 th October in the
businesses second tax year, if you don’t you could be fined. Each partner will have to complete
their own self-assessment tax return individually in addition to the partnership return.

Setting up a Limited Liability Partnership (LLP) is similar to the process of setting up a Limited
Company. The LLP must be registered at Companies House, with accounts submitted on an
annual basis. Any changes to the partnership must be notified to Companies House.
Nominated members are legally responsible if any of these duties are not carried out.

When setting up an LLP, you may want to seek the advice of an Accountant, Solicitor or
Formation Agent to assist you with the formation process.

How am I taxed in a Partnership?

Each partner share of profit in the business is declared on their individual self-assessment tax
return, along with any other income received during the tax year. It is always advisable to seek
the professional assistance of an Accountant when calculating profits generated and taxes
owed to ensure accuracy.

The tax rates, bands and National Insurances due are the same as a sole trader.

Advantages and Disadvantages of setting up a Partnership

Advantages Disadvantages

A General Partnership has low start-up costs

A General Partnership has unlimited liability
and minimal admin

Being able to split profits can be tax

Risk of disagreements between partners
advantageous

Partners joining or leaving will require a

General Partnership business affairs are valuation of the partnership assets which
confidential could incur additional costs with the
accountant

Unlimited liability and restricted capital can

Sharing the burden of running a business
stunt the growth of the business in the future

What is a Private Limited Company?

A Private Limited Company is the most common form of incorporation in the UK. The company
would be formed through Companies House with at least one share and there is no minimal
capital requirement. The company is effectively owned by its shareholders.

A Private Limited Company is a separate legal entity to its shareholders and Directors, this
means that personal assets are not at risk as the risk is limited to their investment. Liability
would only be imposed on the Director in the event of fraudulent or wrongful trading.

How to set up a Private Limited Company?

Firstly, you would need to choose a company name that does not already exist; you need to be
mindful that your new company name does not include sensitive or offensive words or
expressions.
The company would need to be registered with Companies House in the country the company
is based; this can be done online through an online formation agent or through an Accountant.
On completion of the registration, you will receive an Incorporation Certificate, Memorandum
of Articles and Share Certificate. The cost of a formation can ranges from £10 to £100,
depending on how quickly you need the company set up.

How is a Private Limited Company taxed?

The Limited Company will incur corporation tax on an annual basis; this is 19% of profits
(2020/21) and paid to HMRC within 9 months of the company yearend (or 21 months from the
incorporation date if a new company) from the business bank account. Profit is calculated
based on company income less allowable company expenses.

There are a variety of taxes that a Limited Company could register for including the following:

 VAT – A company should register for VAT if the turnover exceeds £85,000 (2020/21) in
a 12-month rolling period. The amount payable is dependent on the scheme that your
company signs up to; all of these options should be discussed with an Accountant.

 PAYE – If the business has employees that they are being paid a salary, then a PAYE
scheme will need to be set up. Tax and employee/employer NI will need to pay to be
paid to HMRC.

Extracting funds from a Limited Company and the associated taxes

Shareholders can receive dividends from a Limited Company, this is a distribution made out of
available profits in the company. A Director of a Limited Company is not bound by minimum
wage and can, therefore, choose to take a low, tax-efficient salary.

Shareholders and Company Directors will need to complete a self-assessment tax return if they
receive dividend income in excess £2,000 (2020/21). Company profits do not need to be
disclosed on a personal self-assessment return for the Director.

Dividend Tax Rates:

Up to £2,000 0%

Basic Rate taxpayers 7.5%

Higher Rate taxpayers 32.5%

Additional Rate taxpayers 38.1%

Advantages and Disadvantages of setting up a Private Limited

Company

Advantages Disadvantages

Liability is limited to the investment made in

Company formation fees payable
the company

Annual accounts and tax returns that need

A Director is not bound by minimum wage,
submitting to HMRC and Companies House
therefore benefiting from tax advantages
– An Accountant can alleviate this stress
 Accounts are published on Companies House
Improved reputation and credibility
which is available to the public

Your company name cannot be used by

anyone else

Significant tax advantages to contributing to a

pension

Allowable expense that can be claimed

through the business to reduce corporation
tax

There is an element of control over when

profits are distributed which can bring tax
efficiencies

What is a Public Limited Company?

A Public Limited Company is registered under the Companies Act (1980). A listed public limited
company can buy and sell shares on the stock exchange. An unlisted company is not listed on
the stock exchange and may choose voluntarily not to be listed or it may be because it does
not qualify to be listed. Each stock exchange has its own listing requirements that must be
met.

How to set up a Public Limited Company?

When setting up a Public Limited Company, firstly a company name needs to be chosen that
has not already been taken and is free from offensive and sensitive expressions and words. The
application to form a company can be done online through a Formation Agent or Accountant.

Before you can consider your business a PLC, you must register for a trading certificate using
the application form SH50 with Companies House.

A minimum of £50,000 share capital is required along with two Directors and a qualified
Company Secretary to set up a Public Limited Company. At least a quarter of the share
(£12,500) must be paid upon start-up.

If you have met the standards required, Companies House will issue the company a trading
certificate.

How am I taxed in a Public Limited Company?

A Public Limited Company and Directors are taxed in the same way as a Private Limited
Company.

Advantages and Disadvantages of setting up a Public Limited Company

Advantages Disadvantages

Being able to raise capital by issuing public

More regulation to follow
shares
Shareholders are able to sell their shares or Full transparency required for shareholders
buy more and investors

Accounts must be audited on an annual basis

Greater credibility and professionalism by a qualified auditor which will incur
additional costs

What is the best option for me?

Private Ltd is best for Sole Trader is best for Partnership is best for
PLC is best for you if:
you if: you if: you if:

There are two

Directors and a
You earn more than There are two of you
Earn lower day rates qualified Company
£16 an hour going into business
Secretary available to
start the business

There is a minimum of
You want to be Working in this You want to share the
£50,000 capital of
protected by Limited capacity for a short burden and costs with
which a quarter is paid
Liability period a Partner
up

You both don’t want

Don’t want the extra You are looking to get
the additional
Happy with a bit of responsibilities of investors to inject
responsibility of
extra Admin running a Limited capital into the
running a Limited
Company business
Company

More on different business structures and limited company taxes to be aware of.

https://www.handhaccountants.com/accountancy-advice/should-i-be-a-sole-trader-
partnership-llp-or-limited-company/

Should I be a Sole Trader, Partnership, LLP or Limited Company?

When starting up your business, deciding on your business’s structure is essential. There are a
range of options to choose from:

 Sole Trader

 Partnership

 Limited Liability Partnership, and

 Limited Company

This page is intended to explain each of the business types, including their advantages and
disadvantages, so you can decide which is the best type for you.
What is a Sole Trader?

A Sole Trader is someone who is self-employed and runs their own business as an individual
(but can also employ staff members). Being a Sole Trader means you are solely responsible for
the business and its debts – the business and the owner are effectively one and the same. This
means any losses made by the business must be paid for out of your own pocket This is
called Unlimited Liability.

Advantages

 After you’ve paid tax, you can keep all business profits.

 You have full control of how your business is run and all decisions can be made by you
alone.

 Your business’s data is kept private (compared to other business types where data is
visible at Companies House).

Disadvantages

 You’re liable for any business losses.

 It can be difficult for a Sole Trader to financially fund their business ventures.

 The pressure for a business to succeed is placed on an individual’s shoulders.

What is a Partnership?

A Partnership is where two or more people form a business together and all business partners
share responsibility for the business. The profits made are split between each partner and they
are individually responsible to pay their share of tax.

Advantages

 The more partners the higher profits possibility and the easier to financially fund the
business.

 A partnership allows a business’s tasks/responsibilities to be assigned to each partner

depending on their skills, which takes the stress off just one person.

 Solving business problems and making decisions can be made easier as you get a
selection of opinions/ideas.

Disadvantages

 The possibility of disagreements/not being able to come to an agreement on how the

business is run.

 Taxation laws say that all partners must pay their own tax, just like a Sole Trader
would. Also if a partnership obtains a certain level of profits, the partners may be
faced to pay more than they would in a limited company.

What is a Limited Liability Partnership?

A Limited Liability Partnership is a business run by two or more people. The partners are not
personally liable for debts the business can’t pay – their liability is limited to the amount of
money they invest in the business. The partners profit shares and responsibilities are
determined by a LLP agreement.

Advantages

 The liability of the business isn’t down to one single person, this includes financial
issues and business responsibilities.

 The flexibility of what and how much each partner contributes to the business.

 Unlimited amount of business partners.

Disadvantages

 Some businesses/clients don’t see Limited Liability Partnerships as a credible business,

whereas corporations are generally more respected.

 Partners are not legally obliged to consult with other partners when business decisions
are being made, which can cause conflicts.

 The LLP Agreement can sometimes cause issues, if a partner wants a say in another
business area but is not allowed to.

What is a Limited Company?

A Limited Company is an organisation that is set up to run a business. Unlike a Sole

Trader/Partnership all of your businesses finances are kept separate to your personal
finances. After payment of corporation tax, the profits are available to distribute to
shareholders as dividends.

There are two types of Limited Companies:

 Public Limited Company (PLC) – Shares can be bought and sold through a stock
exchange.

 Private Limited Company (Ltd) – Cannot buy and sell shares through a stock exchange.

Advantages

 When registering a Limited Company you must register the company name with
Companies House. This business identity is unique to you and will be protected from
other businesses trying to use the same name.

 You have the option to offer company shares to your employees, which motivates
them more and gives the chance to have a say in how the business is run.

Disadvantages

 Bookkeeping and accounting of a Limited Company is more complex as you are

required to keep accurate records as you go along and to submit a range of data each
year.

 Private Limited Companies (Ltd) can’t trade their shares with the public as a way to
boost capital.

 Directors and Shareholders may not agree on how the business is run as well as new
ideas.
 Certain information on the company, its directors and shareholders is avaiable in the
public domain.