One of the first decisions you need to make when starting your business is choosing the right entity. Do you set up as a sole trader, in partnership (if there is more than one of you) or a limited company?

There are advantages and disadvantages for each and the decision will be based on a number of factors including the type and size of your business, the estimated profits it is forecast to make and your own personal tax situation. Some businesses will only deal with limited companies so you need to understand your market when deciding which route to take.

Sole Trader

Most small “one man band” businesses operate as a sole trader as they are easier to set-up with fewer administrative requirements. The owner is personally liable for all of the businesses debts and there is no limit to the extent of your liability. You pay income tax on any taxable profits at the appropriate personal tax rates, even if you have not taken any money out of the business.


As with a sole trader the individual partners own the business and share the profits or losses. Each partner is jointly and severally liable for the business’ debts. This means that if the business is unable to pay its debts the partners could end up having to pay for their partners’ share as well as their own. This does not apply to income tax as each partner is only liable for their own share.

In a partnership it is normal to agree terms at the beginning and confirm these in a Partnership Agreement. This document states how the business is to be run, the partners’ share of the business etc.

Limited Liability Partnership

A Limited Liability Partnership (LLP) offers limited liability to the members (partners) meaning if the business fails the partners are only liable for the amount they have invested and so protects their private assets.

An LLP is subject to many of the same rules as a limited company such as filing accounts however the members are liable to pay tax on the business’ profits and not on the cash they actually take out of the business.

Limited Company

A limited company limits your risk of personal financial loss. Your liability is limited to the amount you invest in the company from buying shares in it. Under normal circumstances, if the business fails, creditors have no legal right to claim repayment from the directors or shareholders. 

In the SME market traditionally the Directors are also the shareholders and are treated as employees. They are paid a salary which is subject to tax and National insurance rules. If the company has sufficient reserves the shareholders can be paid dividends which can have some tax benefits over taking further salary.

A limited company has to file and publish annual accounts by a certain date meaning the financial information becomes publicly available. Missing the filing deadlines will result in the company incurring fines. Accountancy costs for a limited company are generally higher due to the additional work and detail required in order to fulfil their statutory obligations.

The Financial Management Centre offers a company formation and company secretarial service for those wishing to trade by way of limited company.

Sole Trader or Limited Company?

The Financial Management Centre can help you make the right decision for you and assist you with the formalities of setting up your business, including company formations and registering with HM Revenue & Customs. Making the wrong decision can be costly so you should get advice to help you make the right one. Once you are set-up and trading we offer a range of services to help you manage the finances of your businesses leaving you to focus on running and growing it.

Click here to find your nearest office.

Helen Preece
Helen Preece

Helen Preece runs The Financial Management Centre in Brighton. Helen is a CIMA qualified accountant with over 15 years of accountancy and bookkeeping experience. Having previously worked in audit, practice and industry she feels she has varied experience that can be applied to all clients. Helen understands that for small business the finance and bookkeeping side is not normally the first thing on the business owners ‘To Do’ list.