Starting a business can be daunting between sales, marketing, and day-to-day financing, plus there is the big question of which business structure to use.
The three most common types – a company, a partnership, or a sole trader – have very different cost and administrative burdens, as well as different implications when it comes to legal status and liability.
Find out more about the pros and cons of each below.
#1 Going it alone as a sole trader
– A sole trader structure is where one individual owns and runs the business, making it one of the simplest and most common business setups. It’s easy to establish and manage, with minimal administrative requirements. From a tax perspective, profits or losses are reported directly in your personal tax return, which keeps things straightforward. You can also hire employees as your business grows, so the structure doesn’t limit expansion.
– However, there are important risks to consider. As a sole trader, you have unlimited liability, meaning there’s no separation between your personal and business finances. If the business faces financial or legal issues, you are personally responsible, which can put your personal assets at risk.
– Because of this, having adequate insurance is highly recommended. Another drawback is that raising external investment can be difficult. Since a sole trader structure doesn’t involve shares or equity, there’s little incentive for investors to contribute funds compared to other business structures
#2 Working within a partnership
– A partnership is formed when two or more people go into business together, sharing ownership, responsibilities, and outcomes. It’s a practical way to combine skills, knowledge, and financial resources, making it easier and more affordable to start and run a business. Partnerships are relatively simple to set up and manage, but it’s important to have a formal partnership agreement in place, especially outlining how profits are shared to help avoid disputes in the future.
– From a tax perspective, partnerships are straightforward. The business itself does not pay tax; instead, each partner reports their share of the profits in their personal tax return and is taxed at their individual marginal rate. However, partnerships come with risks.
– They do not offer the same legal protection as a company, and partners are usually jointly and severally liable for any debts. This means each partner can be held responsible for the full amount if the business runs into financial trouble, so seeking professional advice is recommended.
#3 Operating as a company
– A company is a separate legal entity from its owners (shareholders), meaning it can operate independently. A company can have a single shareholder or multiple shareholders.
– One of the key advantages is limited liability, shareholders are generally only responsible for the amount they have invested. Companies can also make it easier to attract external investors or sell the business in the future.
– However, companies are more complex and costly to operate than simpler structures. They involve setup costs and must comply with ongoing legal and regulatory obligations, including financial reporting and tax filings.
– Due to the separation between the business and its owners, company funds belong to the company itself. Accessing money requires structured methods such as salary, dividends, or director’s loans, and it’s important to seek advice to determine the most appropriate approach.
Which structure is best?
Choosing a business structure is always a very personal decision. Need help deciding which one is right for your circumstances? Book some time with our team today, we’d be happy to discuss the best option for you.
The team at EMspire Advisory are trusted, qualified Chartered Accountants, tax agents, and small business accountants. We work closely with our clients to achieve the best possible outcomes. To find out more, please contact us!
Please note that this information is not specific and is general in nature and cannot be relied on as advice. Please contact us for advice specific to you and your circumstances.