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Being a sole trader means being in business on your own. It’s a relatively straightforward structure, where you are self-employed and, legally, you and your business are considered as one. It’s the most common structure used by self-employed individuals and small businesses.
The advantages are:
The disadvantages are:
If you decide to set up as a sole trader, ensure you notify HMRC within three months of beginning trading. You also need business insurance to cover your venture – see our guide to insurance for traders and local businesses for more details.
Partnerships can operate in a similar straightforward way to a sole-trader structure – only there is more than one owner involved. Each owner is jointly responsible for the debts of the business. If one or more partners leave the business, then the remaining partner(s) are responsible for all debts.
An alternative partnership structure, which provides more protection against personal bankruptcy, is a limited liability partnership (LLP). This is a more complex business structure and must be registered with Companies House, where all basic business information must be on public record – much like a limited company.
Some businesses start out as a simple partnership, but then choose to change status to a limited company or a limited liability partnership.
Whether you plan to run your business as a simple or limited liability partnership, you should ensure you have a partnership agreement in place to create the correct legal framework for the business. You can use an off-the-shelf template, which you can find online, but it’s probably a good idea to take legal advice. See our article on how to find a lawyer for more information. It’s important that all partners share the same goals for the business and will work together to achieve them.
The advantages of a partnership are:
The disadvantages of a partnership are:
A limited company is legally separate from the individuals who set it up, so it is responsible for its own debts. If things go wrong, it’s the company that goes bust, not you – as long as you can establish that you have run the operation legally and in good faith.
Limited companies can also add to your credibility if you’re dealing with other businesses. On the downside, you are required to submit annual accounts to Companies House, and there is an increased level of administration and government regulation to deal with.
The advantages of limited-company status are:
Disadvantages of limited-company status are:
Remember to keep your business structure under review as it develops. It’s relatively straightforward to switch from sole-trader status to a partnership or a limited company. However, you may wish to consultant an accountant before taking this step. If you don’t already have one, see our article on finding an accountant for tips on finding one that suits your business.
If you do change your business structure, you will need to amend all paperwork to reflect the changes, and also your website, in line with The Companies (Trading Disclosures) Regulations 2008 and e-Commerce Regulations.
Any Which? Trusted trader changing its business structure will need to sign a new agreement with us, as a new legal entity. Which? Trusted Traders would also need to see its accounts after six months of trading activity.
It’s also a good idea to clearly state the name you were formerly trading under on your Which? Trusted trader profile page, so consumers can see any change of legal entity.