Sole Trader or Limited Company

When you’re setting up a new business, one of the major decisions you have to make is the type of company it will be. Each different format has different implications for tax, ownership and responsibility. Here we outline the main points of each company structure.

Sole trader or limited company?

Sole trader

• Setting up in business on your own
gives you complete control and fewer
administrative burdens.
• But there are implications for tax and
raising finance.
• As you have unlimited liability, you could
risk personal loss if something were to go
seriously wrong.
• Sole traders include an annual self
employment return with their income tax
return and pay income tax and national
insurance contributions on the profits.

Partnership

• If two or more people run a business
together as partners, they share profits,
losses and unlimited legal liability.
• It is a common formula, but it is essential
to define the rights and responsibilities
of partners and to set them out in a
partnership deed. This requires special
accountancy and legal skills.
• All partners include an annual self
employment return with their income
tax return as well as a partnership tax
return (showing how profits were divided
between the partners).
• Partners pay income tax and national
insurance contributions on their share of
the profits.