Sole trader
Sole trader: This business structure is for individuals who set up on their own (a one-man band), it includes people who work in the building trade, such as plumbers, electricians and joiners, but can also include people working in service industries, such as hairdressers, IT consultants or bookkeepers.
A sole trader is responsible for all areas of the business, which includes:
- completing all jobs or services to the customers’ satisfaction
- finance, paying all associated costs and ensuring the customers pay on time
- marketing and selling.
They will receive all of the rewards of the business (profits) but are also responsible for taking risks and incurring costs (liabilities).
A sole trader must register with HMRC (Her Majesty’s Revenue and Customs) under self-assessment and complete an annual self-assessment tax return. Both income tax and national insurance are payable on profits.
Partnership
Partnership: This business structure is for two or more individuals who work in business together. Partnerships were set up for professions such as doctors, dentists and solicitors but they cover a wide variety of other industries such as the building trade and beauty providers. Partners are jointly responsible for all areas of the business and will often specialise in a particular area.
For example, a partnership in the building trade may have different partners with expertise in plumbing, plastering, electrical work and general construction. In a hair and beauty salon, one partner may be a trained hairdresser and another a trained beautician. Partners will split all of the rewards of the business (profits) but are jointly responsible for taking risks and incurring costs (liabilities).
A partnership must register with HMRC under self-assessment and complete an annual self-assessment tax return for the partnership. The individual partners must also register for self-assessment and complete their own individual self-assessment tax returns. Both income tax and national insurance are payable on each partners share of their profits.
Private limited company (Ltd)
Private limited company (Ltd): The owners of a business (whether they be sole traders or partnerships) may decide to form a private limited company at any time. It could be from the date the business starts, or any point in time once the business has been established. Private limited companies must have at least one director and one shareholder, in a small business they are often the same person.
A limited company is a separate legal entity. Shareholders will only lose the value of any amounts they have invested in the business (i.e. the share capital).
Directors are responsible for the running of the company and will often receive a salary which is deducted from the profits of the business. Shareholders receive dividends based on how the company performs.
Registration of a limited company must initially be done through Companies House, who will then inform HMRC (Her Majesty’s Revenue and Customs). Limited companies pay Corporation Tax on their profits.
Brought to you by:
Sage
Sage Business Cloud Accounting is online accounting software that provides anytime, anywhere access to essential small business tools. Its features help you manage cash flow and send and track invoices, all through the cloud or via a mobile app.
Get limited time offer 
