One of the first considerations for aspiring business owners is which model to opt for. There are pros and cons to each option. In this guide, we’ll take a closer look at different business models to help you decide which is right for you.
What is a sole trader and what are the advantages?
If you decide to be a sole trader, you and your business will be classed as a single entity. This means that you assume responsibility for the venture and that you pay tax on the income you receive through filing an annual tax return. Your profits are deemed personal income. One of the main advantages of being a sole trader is the simplicity and speed of getting started. This is a straightforward way to run a business. You don’t have to register with HMRC and the administration process is less complex than setting up a limited company. If you choose to close the business down, it’s also much easier to do this as a sole trader.
What is a partnership?
A partnership is effectively very similar to a sole trader model, but in this scenario, you run with the business with others. Each owner must pay tax on the percentage of the business they own in line with the terms set out in a partnership agreement. It can be advantageous to have a partner in business for multiple reasons. Different people have varied skill sets and levels of experience, which can benefit the venture as a whole and improve operations and it can also be beneficial to share the responsibility with others. A partnership is a more flexible arrangement than a limited company. The one downside of a partnership is the potential for disputes to arise. If you are going into a partnership, it’s crucial to make sure that you trust the other individuals involved and that you share the same vision.
Setting up a limited company
If you set up a limited company, your business becomes a separate, independent entity. You must register the business with Companies House and you must adhere to rules and regulations governing compliance and taxation. With a limited company, the business is owned by shareholders. The number of shareholders varies from one business to the next. Limited companies must submit annual accounts and a corporation tax return. As the process is more time-consuming and complex, many businesses hire accountants to take care of this aspect of running the company for them. Although it takes longer to get a limited company set up and ready, there are benefits. Running a limited company is often more tax-efficient, and separating personal and business income can reduce liability. There is also the flexibility offered by being able to keep or sell shares.
Summary: Which model is best for you?
There are advantages and disadvantages to every model. Setting up as a sole trader or a partnership is often simpler and faster, and this model works well for small businesses, aspiring entrepreneurs and ventures with a small number of owners. Limited companies require more effort and endeavour to register and launch, but they are often more tax-efficient, they have a professional image and personal risk is reduced.
