Forming a business: sole trader, partnership or limited liability partnership?

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This is a guide to forming a business as a sole trader, a partnership or a limited liability company. The article gives you the lowdown on how to choose the underlying legal structure of your business and discusses the advantages and disadvantages of being a sole trader, a partnership or a limited liability company.

Sole trader
Being a sole trader is probably the most straightforward way to form a business. Sole trader status is a popular choice for start-ups who don’t have much cash to spend on professional advice about the company formation process. You don’t have to be strapped for cash just because you are a sole trader though. Cash experts from the Wongaforbusiness website are always on hand if you need cash to tide you over in an emergency.

As a sole trader, you will need to register with the HMRC as such, but this is pretty much the only exercise in paperwork necessary.

Being a sole trader you are responsible for all of the decisions the company takes on a day to day basis, and you probably won’t have shareholders or a board to worry about which makes the day to management of the business much more straightforward.

A downside to being a sole trader though is that you are personally responsible for any losses the company makes. This means, if your company goes bankrupt, you may have to sell your personal possessions including your house to meet any debts your business owes to creditors. If your business is a limited liability partnership, this is not the case because your business is seen as having its own legal personality. This means if the business goes bankrupt, creditors are not able to pursue the personal assets of the owner of the company.

Partnership
Another option for business formation is a partnership. You can form a partnership without much fuss or paperwork, and this means that you share the business with your partner.

Partnering up with someone else can bring expertise and more cash into the business.

On the downside though, if the business goes bankrupt both partners are personally and equally responsible for the losses of the company. This means that if your partner can’t pay their way, you as the remaining partner get saddled with the debts of the business. Moreover, you are personally responsible for those debts and you could even be forced to sell your house if things go wrong and the partnership ends up in debt.

Limited liability company
A limited liability partnership or LLP is where you create a separate legal personality for your business and the business is called a company. To do this you have to register the company at Companies House and pay a fee. You may also have to pay for advice about the process, and this can be costly and time-consuming. The advantage of this though is that you are not always personally responsible for the losses of the company, which means that if the company goes bankrupt you won’t be forced to sell your house and personal possessions to pay any business debts.

The content is for discussion purposes only and is not advice of any kind. Readers should always take professional advice from a qualified expert about any business matters.