Sole Trader, Partnership or Limited Company? Which is Best?
If you’re an ambitious entrepreneur with a wealth of bright, innovative ideas, getting the ball rolling might seem like the highest priority. One of the most vital decisions you’ll need to make to do that, however, is selecting the right business structure.
Whether you’re launching a startup, restructuring an existing business, partnering, or setting up a business with shareholders, the legal setup you establish will impact your tax position, liability, administrative workload, and possibly even your growth prospects and potential.
At Hamlyns, we regularly guide entrepreneurs and business owners through this vital, far-reaching decision.
The choice of operating either as a sole trader, forming a partnership, or incorporating as a limited company should be made on the basis of an understanding of your risk tolerance, business growth ambitions and long-term planning and goals. In this article, we’ll explore the key differences between these common business structures and help you understand which option might be right for you.
Setting Up a Sole Trader Business
Operating as a sole trader is the simplest business structure in the UK, with sole traders representing approximately 56% of all UK small businesses, based on recent data.
As a sole trader, there is no legal distinction between you and the business or your trading activity. You register with HMRC for Self-Assessment, keep records of income and expenses, and file an annual tax return.
Advantages of Trading as a Sole Trader
- Complete control over all business decisions
- Keep all profits after taxes and other liabilities
- Minimal setup, paperwork and administrative requirements
- No need to file accounts on Companies House
- Easy and cost-effective to establish and run
- Hiring staff is possible
Considerations of Working as a Sole Trader
- Unlimited personal liability for business debts (meaning that personal assets and even your home could be at risk)
- Can be difficult to raise substantial finance or capital, particularly in the early stages
- May pay more tax as profits increase
- Full responsibility rests on one person
Setting Up a Partnership
A partnership business is when two or more individuals form a business, and as business partners, they share responsibility. Operating under the Partnership Act 1890, partnerships are relatively informal.
Benefits of Operating in a Partnership
- Flexibility in assignment of shareholder and director roles
- Combined, skills, experience and resources
- No formal registration requirements (though partnership agreement is recommended)
- Profits split between partners (after individual taxes paid)
- Business tasks and responsibilities can be split, not forming the remit of one person
- The more partners, the higher the profit potential
- Access to upfront funding capital becomes easier
Drawbacks of a Business Partnership
- Each partner is joint and severally liable for partnership debts
- Risk of disputes without a formal agreement in place
- If a partnership obtains a certain level of profits, partners may pay more tax than they would in a limited company arrangement
- Partners taxed individually through Self-Assessment (just like sole traders)
Setting Up a Limited Company
A limited company is a distinct legal entity, separate from its owners (shareholders) and managers (directors). This is an organisation explicitly set up for business purposes, where all business finances are kept separate from personal finances, and once Corporation Tax is paid, profits are available to distribute to shareholders as dividends.
Limited companies can exist as either a;
- Public Limited Company (PLC) – where shares can be bought or sold through stock exchanges, or a;
- Private Limited Company (Ltd) – where no such shares can be exchanged.
Advantages of a Limited Company Setup
- The business has limited liability which protects personal assets in case debts accrue
- More tax-efficient at higher profit levels
- Enhanced credibility with clients and suppliers
- Companies responsible for their own debts and liabilities, maintaining their own identity from owners and directors
- Easier to raise investment capital from certain lenders
- Access to tax reliefs (SEIS, EIS, among others)
Considerations When Setting Up a Limited Company
- Complex setup and ongoing administration compared to sole traders and partnerships, often requiring solicitors and accountants
- Must file accounts publicly and articles of association with Companies House
- Shareholders agreements may also be necessary
- Strict compliance deadlines with the ongoing risk of penalties for failing to adhere to
- Likely to have higher long-term accounting costs
- Directors have legal duties and responsibilities
Sole Trader vs Partnership vs Limited Company: Comparison Table
| Aspect | Sole Trader | Partnership | Limited Company |
| Legal status | No separation between owner and business | No separation between partners and business | Separate legal entity |
| Liability | Unlimited personal liability | Joint and severally liable (unlimited) | Limited to share capital invested |
| Tax | Income tax on profits via Self-Assessment | Each partner pays income tax via Self-Assessment | Corporation Tax on company profits; income tax on salary/dividends |
| Setup Complexity | Very simple: register with HMRC | Simple, but partnership agreement recommended | More complex and time-consuming |
| Admin and record-keeping | Low and no public filing required | Low and no public filing required | High: annual accounts, Confirmation Statement, statutory records, etc. |
| Privacy | High | High | Low: accounts and details publicly available via Companies House |
| Credibility | Lower perceived credibility | Moderate credibility | Higher credibility with clients and lenders |
| Access to capital | Difficult to raise external finance | Moderate, depending on partners’ resources | Easier to attract investors and secure funding |
| Tax efficiency | Less efficient at higher profits | Less efficient at higher profits | More efficient through salary and dividend mix |
| Ownership | Single individual only | Minimum two partners, no maximum | Minimum one shareholder, no maximum |
| Decision making | Down to the individual only | Shared between partners (majority vote typical) | Directors manage day-to-day operations; shareholders approve major decisions |
| Long-term costs | Comparatively low | Low to moderate | Moderate to high (accounting, filing fees, and more) |
Making the Right Choice for Your Business
When starting a business venture, it’s important to consider what legal structure and setup is best for you and your specific circumstances. Consider factors such as your risk tolerance, profit levels, growth plans, funding requirements, and willingness to handle business admin.
It’s also worth noting that business structure isn’t a permanent decision. Many successful businesses start as sole traders before incorporating as limited companies once they reach certain profit levels or require limited liability protection. This is very normal and can be managed efficiently with proper planning.
Professional Business Services from Hamlyns
At Hamlyns, our experienced chartered accountants work with entrepreneurs and established businesses throughout Surrey and beyond, providing tailored advice on business structures that would suit your areas of operation and long-term goals. We will take the time to analyse your specific situation and forecast the financial and legal implications of your chosen structure, and recommend the best approach for you and your goals.
Whether you’re just starting out or considering restructuring an existing business, we can guide you through the processes and ensure you remain compliant with all relevant legal and tax obligations.
Contact Hamlyns today to discuss which structure is right for your business and how we can support your success every step of the way.
