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NewslettersSole Trader vs Partnership: right business structure in the UK?
When you start your business in the UK, you will need to understand the legal structure. In the UK, you can opt for anyone from a limited company, sole trader or partnership. Of these three, sole traders and partnerships are the most popular. It is necessary to note that both partnership and sole traders have advantages and disadvantages.
Before deciding on your company's legal structure, it is advisable to reach out to an accountant. The accountant will help you understand the difference between the three of them so that you can be familiar with the tax implications and benefits each of them offers.
What is a sole trader?
A sole trader refers to a self-employed person who is the main or sole owner of the business. It is one of the simplest and most popular business structures. In 2024, around 3.8 million sole traders made up to 60% of the small businesses in the UK.
To establish your business as a sole trader, you must tell HMRC that you're paying tax using the Self-Assessment procedure. You must file the return annually as a sole trader to prove or declare the earnings. Moreover, you will only be responsible for the losses and earnings the business makes. Therefore, keeping a record of all expenses and sales is crucial.
Advantages of sole trader
Being a sole trader in the UK can bring many benefits. Some of the most prominent benefits of starting up your business in the initial stages as the sole trader include
- Easy set up;
- Very less paperwork;
- Privacy of business as there is no need to file any account documents.
Disadvantages of sole trader
While there are various benefits of being a sole trader, it has its fair share of disadvantages. Some disadvantages of being a sole trader in the UK include
- As a sole trader, you may have difficulty in the initial stages of getting funding for the business. This is mainly because banks and investors prefer investing in companies with a robust business structure.
- The sole traders will have unlimited liability. The UK government doesn't consider sole traders a different legal entity. Therefore, you are liable for paying the debt if your business faces any loss.
What is a partnership?
A partnership is the oldest form of business arrangement. It ensures that the business grows as per the development law. Partnership refers to a business structure for a business that two or more people have set up to make a profit. If two or more individuals form a partnership, they must register their company as per The Partnership Act 1890.
The partnership businesses do not have a separate legal personality from that of partners. Therefore, they cannot own any asset in its name. In partnership companies, all the partners have equal rights in business. They will be liable for any profit or loss that the company makes. The partners will also be liable for income tax. If these partners were sole traders earlier, they would be taxed individually.
Advantages of partnership
Establishing your business in partnership in the UK can offer a wide range of benefits. It is packed with advantages that can be very fulfilling for your business. Some common advantages of a partnership include
- There are no prescribed shareholder or director roles in partnership like in limited companies. Therefore, partnership companies bring a lot of flexibility in terms of management and operations.
- Partnership businesses do not usually have to go through the pain of registration requirements. Hence, there is a lack of formality. Nonetheless, you must consider getting the partnership agreement to avoid confusion among the partners later.
Disadvantages of partnership
Like a coin, every partnership aspect has two sides. Therefore, there are advantages and disadvantages too. Some common disadvantages of the partnership include:
- Many individuals often get into the partnership without proper knowledge. However, there might be a risk of discussion in the later stages. The friction among the partners in later stages can harm business. Hence, it is recommended that the partners get a formal agreement.
- Every partner will be in a joint partnership, and they will be liable for any loss that the business makes. If the business is in debt, every partner will be liable for clearing these debts equally.
Sole trader vs partnership: a comparison
Below is a brief comparison between a sole trader and partnership business structure:
| Sole Trader | Partnership | |
|---|---|---|
|
Ownership |
The business will have a single owner. |
The business will have two or more owners with respective shares. |
|
Decision-making |
The single owner will be liable for making any major decisions regarding the business. |
All the owners or partners of the business will have a say in the business. In a traditional partnership, the decisions will be made by the majority. |
|
Liability |
There is no distinction between the owner and the business. If the business incurs any loss or debt, the owner will be liable for clearing it off. |
There is no legal difference between the business and the owner. If the business suffers any loss or has any debt, the partners of the business will be liable for clearing it. |
|
Tax and tax incentives |
The sole traders pay tax on their profits by filing for Self-Assessment. |
The partners will need to file for tax on profits by filing a Self-Assessment. |
|
Transparency |
The sole traders do not need to file for annual accounts. However, it is advisable to keep a record of business expenses and earnings strictly. |
The partners do not have to file for annual accounts, but they must keep a record of all relevant information regarding their business. |
Conclusion:
Whether you opt for a partnership or sole trader, you must understand your business needs. Every business's requirements are different, so you can't just hop onto the bandwagon thinking it would suit your needs. Moreover, a partnership will require you to collaborate with others for business purposes. You can't collaborate with anyone unless you know them. This can, however, hurt your business.
The type of business structure you choose completely depends on what the business requirements are. It also depends on your preferences so that you make the right choice. You can connect with an accountant to understand each business structure and then choose accordingly.
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