When you’re looking to start a business, one of the first decisions you must make is to choose the right legal structure for it.
The two most common options are becoming a sole trader or forming a partnership but you can also choose to register as a limited company. Whichever option you choose has its own set of advantages and disadvantages, and it’s important to understand the differences to make an informed decision.
Is it better to be a partnership or limited company?
A partnership is a business structure where two or more individuals or entities come together to operate a business.
Setting a partnership up is fairly easy and cost-effective, as there are fewer formalities and administrative requirements compared to a limited company. Partnerships often suit small businesses where two or more people want to combine their skills, resources, and expertise.
Some key advantages of a partnership include:
- Pooling resources: Partners can pool their financial resources – making it easier to access capital and assets.
- Shared responsibility: In a partnership, the burden of running the business is distributed among partners, which can lead to a lighter workload for each individual.
- Ease of formation: Setting up a partnership is straightforward as it usually only requires a partnership agreement.
Some key disadvantages of a partnership include:
- Unlimited liability: Partnerships have unlimited liability, meaning personal assets are at risk if the business incurs debts or legal issues.
- Shared profits: Profits are shared among partners, which may not be equitable if one partner contributes significantly more than others.
A limited company is a separate legal entity from its owners (shareholders). It offers limited liability protection, which means that shareholders are generally not personally liable for the company’s debts or legal obligations. Limited companies are a popular choice for businesses with substantial growth potential or complex ownership structures.
Some key advantages of a limited company include:
- Limited liability: Shareholders’ personal assets are protected from business-related liabilities – offering security and peace of mind.
- Tax benefits: Limited companies often have more tax-efficient structures which enables them to retain profits and distribute dividends strategically.
- Credibility: Limited companies often appear more professional and credible to clients, suppliers, and investors.
Some key disadvantages of a limited company include:
- Complex administration: Limited companies require more paperwork, including annual financial statements and compliance with company law.
- Higher costs: Setting up and maintaining a limited company can be more expensive due to registration fees and ongoing administrative expenses.
Can one person be a limited company?
Yes, it is possible for one person to be a limited company. This business structure is commonly known as a “sole proprietorship” or “sole trader limited company.” It offers the advantages of limited liability while allowing individuals to retain full control of their business.
Do you pay less tax if you are a limited company?
Limited companies often have more tax planning flexibility compared to sole traders or partnerships.
Here are some tax-related considerations:
- Corporation tax: Limited companies pay corporation tax on their profits, which is often lower than the income tax rates for individuals. This can result in potential tax savings.
- Dividend tax: Shareholders of limited companies can receive income in the form of dividends, which may be subject to lower tax rates than regular income.
Choosing between a limited company, sole trader, or partnership structure
The choice between a limited company, sole trader, or partnership depends on your business goals, risk tolerance, and financial situation.
Each structure has its own benefits and drawbacks, and there is no one-size-fits-all answer. If you’re unsure, get in touch with me for some professional advice to help you make the right decision for your entrepreneurial journey.