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So you have a great idea for a business – awesome!

But then the questions start… what’s the difference between a sole trader and limited company? What are the pros and cons of each?

Suddenly this can become very daunting – but it doesn’t need to be. This blog will give you a basic rundown of the different business structures commonly seen and help you decide which option is best.

Sole Trader

A sole trader is someone who is in business or contracting on their own. This is often the way many start out and as they grow they change to another business structure. This option is often easy to setup and is a low-cost choice. It does come with its risks though, like you’re liable for all debts which can expose personal assets, such as your home, and business growth can be difficult.

Partnerships

A partnership is created when two or more people go into business together and have agreed on how they will share the profits, debts and work. This option is often chosen because things like workloads and costs can be shared. The risks involved here are like that of a sole trader where you are liable for all the partnerships debts (both yours and potentially other partners) which can expose your personal assets. You should also ensure that your partners are well-aligned with your overall goals and matters such as roles and responsibilities are agreed and documented.

Companies

A company is a legal entity that is distinct from the people who own it, the shareholders. The shareholders are ultimately the ones that get to split the profits but normally need to fund the business through providing capital at the outset. The benefits of a company can include a grander public perception, a lower top tax rate (although this may be only temporary), and can allow for more risk to be undertaken through the limited liability afforded to the shareholders.

However, with small companies the shareholders often occupy positions as directors of the company which can expose them to trading risks. Companies can also have more compliance costs, reporting and other tax issues due to the separate legal entity status.

The Ministry of Business, Innovation and Employment have put together a full explanation of what each of the business structures above mean. They also have handy checklists and tips that can help you along the way.

If you are looking at starting your own business, then More CA are here to help. We have first hand experience in getting a business off the ground and love to help others achieve the same success. Contact us today to see how we can set the foundations for you to reach up and realise your goals.