Ordering a coffee used to be a simple process, with the choices limited: “Would you like milk and sugar?” Now, visiting a coffee shop presents an array of options – caffeinated, decaffeinated, americano, latte, cappuccino, espresso, soy milk, oat milk, syrup? Many people know what they want when they get to the counter, but if you aren’t sure, then too many alternatives can lead to almost paralysing indecision, and leave you mumbling, “I’ll have a cup of tea please.”
One of the most common questions we are asked is ‘what is the best way to start trading?’ and whether this should this be through a company, as a sole trader, or a partnership.
This decision will depend on legal, commercial and administrative factors, as well as taxation. And of course, one size doesn’t fit all. It’s a big decision and there’s lot of information online to wade through to find an answer – it’s easy to feel daunted.
The table below sets out the headline features of each type of structure. But this is just a starting point; get in touch and we’d be really happy to talk through the different options and what might be best for you. Just give us a call or send us a WhatsApp. Our Client Experience Manager, Vicki, is here to answer your initial questions, and can arrange a follow up with Mel, Emma or Steve, depending on your requirements.
| Sole trader | Partnership | Company | |
|---|---|---|---|
| Risk | Sole trader is personally liable for all business debts. | Partners are personally liable for all business debts unless a limited liability partnership. | Company is a separate legal entity. Shareholders have limited liability. |
| Flexibility of taking profits | Profits are treated as earnings of the sole trader in the period they accrue. | Profits are allocated to partners in the period in which they accrue. | More flexibility over how and when profits are paid out to owners. |
| Administration | Low | Relatively low | Higher level |
| Raising finance | Raise money for the business out of sole traders’ assets and/or with loans from banks or other lenders. | Raise money for the business out of partners’ assets and/or with loans from banks or other lenders. | Finance comes from shareholders, loans to the company and retained profits. |
| Disclosure | No obligation to publicly disclose any information. | As for a sole trader, unless a limited liability partnership, in which case the requirements are similar to those of a company. No public register of partnerships. LLP’s are required to file their accounts at Companies House. | Much more disclosure – information about directors, annual accounts and details of its name and registered office are published by Companies House. |
| Taxable entity | Individual sole trader is taxed through self-assessment. | Profits allocated to partners according to profit sharing ratio and taxed through self-assessment. | Company taxed as a separate entity and owners only taxed if profits extracted. |
| Tax rate on trading profits | Income tax at 20%, 40% or 45% on all taxable trade profits. | Income tax at 20%, 40% or 45% on partner’s share of taxable trade profits. | Corporation tax at 25% on taxable trade profits (with possible marginal relief depending on profit level). |
| VAT | Individual registered for VAT not the business when taxable turnover exceeds the VAT registration threshold. | Partnership will need to be registered if the business’ turnover exceeds the VAT registration threshold. | Company registers in own name if VAT registration threshold reached. |
| NIC | Class 4 Class 2 voluntary from 2024/25 | Class 4 Class 2 voluntary from 2024/25 | Class 1 paid on any salary and benefits |