Before we begin, your decision will often depend on the tax implications so make sure you speak to an accountant to work out the best option for you.
This is basically you as a one-man band.
- A pro of being a sole trader is flexible in that you work for yourself as and when you want to
- You have freedom of decision making
- It’s easy to establish and your start-up costs will be relatively low.
- You are personally responsible for your organisation’s debt, so that if you get into any trouble, your house, car and bank accounts are up for grabs
- You will need to pay income tax on your earnings, and depending on which tax bracket you fall into, the tax could eat into your profits
- You will also need to file annual self-assessments with HMRC
- You may struggle to raise finance via investment.
A limited company is one registered at Companies House and you will see ‘limited’ or ‘ltd’ at the end of the name.
- If you set up a limited company, that company becomes a separate legal entity of which you might be both a director and shareholder. You can’t be held personally liable for any debts of the company, so that your house and car are protected
- A limited company tends to be more tax efficient as you pay corporation tax rather than income tax
- It is super cheap and quick – a one-off fee of £13 payable to Companies House
- You may be taken more seriously by clients and potential employees’ and it could be easier to raise capital from investors.
· Similar to a sole trader, you will need to file your accounts with Companies House annually
· Your accounts are public documents, so the Joneses know how much your company is making.
This is where you have two or more sole traders working together in the running of a business and so the same pros and cons apply to a partnership as they do to sole traders.
One thing to remember though: even if you are teaming up with your best friend, it is important to draw up a partnership agreement between you which sets out your roles and responsibilities, and what to do if it all goes Pete Tong.