Format of the Business

In the UK, a trading business may be carried out in one of – or a combination of – several formats.  These are sole trader, partnership, limited liability partnership or limited company (private or public).  The decision as to which to choose will depend upon many factors, such as:

• The involvement of others
• The likelihood of losses
• Whether the profits will be distributed or reinvested
• The potential tax liabilities of the traders
• The potential levels of business risk
• Administrative obligations

Sole trader
As a Sole trader you and the business are one.  You own the goods, you supply products and services, your customers owe you money.  You personally make a profit and business profits are taxed as your personal income (regardless of what you actually draw to spend personally).  You are personally liable for any debts and any losses are yours.  The relationships between your business and your customers, your creditors, the Inland Revenue, Customs and Excise and so on, are all with you personally.  A Sole trader will pay income tax through the self-assessment system, as well as Class 2 and Class 4 National Insurance, and VAT if the registration threshold is reached (£68,000 from 1 May 2009).

Partnership
A partnership is very similar to a sole trader but has two or more persons involved.  Although you can agree a split of income (e.g. for tax purposes) all liabilities fall on each and every partner regardless of commitment or responsibility.  Therefore it is essential to draw up a partnership agreement, beforehand, saying what is to happen in every eventuality e.g. profits, losses, death.  Each partner pays income tax through the self-assessment system, as well as Class 2 and Class 4 National Insurance, and the business itself pays VAT once the registration threshold is reached.

Limited Liability Partnership
This is a relatively new entity created January 2001.  They operate like limited companies with all the reporting rules and legal protection but are taxed like partnerships.

Limited Company
A Registered Limited Company is completely different.  A company is a totally separate legal person.  The company owns the goods and services, and customers owe the company for these.  The company can take on debts and can own or lease property.  If the company makes a profit it pays Corporation Tax.  Although your day to day running of the business is almost identical to when you are a sole trader, all these transactions are distinct from you.  When you form a company someone/you becomes its owner (shareholders).  And it is an asset - like property - which you invest in and can sell.  Income from this investment (shares in your company), comes in the form of dividends, paid out of taxed profits.  Directors and employees run the company and earn a taxed salary.

A company registration agent may be used to buy a company ‘off the shelf’ or a new one can be created and registered with Companies House.  Limited companies should always display their full corporate name outside the business premises, and registration details must also appear on the stationery and, from 1 January 2007, on e-mail communications and websites.  Company directors have certain obligations.  They need to file statutory documents, such as accounts and annual returns.  Companies are liable to corporation tax on company profits.  Company directors are also employees of the company, so there are different National Insurance and PAYE obligations.  Even though a company director is an employee, they still need to register for self-assessment.  The same applies to each director in a limited company.


Advantages and disadvantages of a limited company
Partnerships agreements