Contributed article in our business series. Enjoy! – Kimberly
Starting a business requires more than a great idea. You need grit and determination, plus a healthy dose of resilience. There is a lot to think about in the early stages, but one of the most important decisions is how you want to trade.
There are many considerations when deciding what type of structure is right for your business and making the wrong decision could have disastrous consequences for your future business, so it is essential that you consider the merits of operating as a sole trader/Sole Proprietor, an LLC, or an LLP, or even as a corporation as your business grows.
Sole Traders/Sole Proprietor
If you are going into business on your own, in whatever capacity, you will probably begin your business career as a sole trader. This is the simplest way of doing business. You will be expected to keep financial records and file accounts, but profits are yours to spend as you wish. However, if you want to work with others or employ people, it is wise to consider a different legal status for your business.
Limited Liability Partnerships
LLPs, or limited liability partnerships, are a common type of flexible professional business structure. Lawyers, accountants, and other professionals often set up an LLP to manage their businesses. Each partner has a share in the business and is entitled to a slice of the profits. Partners are protected from liability, as long as they don’t become a managing partner. Unlike an LLC, at least one partner must be responsible for the firm’s liabilities.
Limited Liability Companies
LLCs or limited liability companies enjoy a lot of flexibility. Company owners are protected from business debt and other liabilities. In the US, LLCs are subject to very few formalities and business members file tax returns via their personal account. In the UK, the situation is different. There, limited companies have to file company tax returns and are taxed differently. Profits are retained in the company unless distributed via dividends. However, both structures offer a number of advantages and are ideal for small businesses.
Pros and Cons
Each of the above business structure has pros and cons. Operating as a sole trader is ideal if you work alone and you want immediate access to any profits you make, but you are personally liable if your business falls into debt or you make a major mistake. For this reason, liability insurance is essential.
A limited partnership is easy to set up and offers plenty of flexibility. Only one person is liable for the business, but disagreements can arise and all partners are liable for the wrongdoing of another partner.
Limited liability companies lack the credibility of a larger corporation and there is a lot of onerous administration attached to running an LLC, but there are numerous tax advantages.
As you can see, there are plenty of pros and cons attached to each business entity. Before you make a final decision, it is essential that you consider the tax position and legalities of each business structure. If you are operating alone, you may wish to start as a sole trader and then become a limited company if the business is a success, but it is best to take professional advice in the first instance.by