It can be difficult working out what sort of business structure you should have, most people are deciding between sole trader or partnership or a company. Here are some advantages and disadvantages of each;
Sole Traders,
Advantages
- Low cost of entry
- Easy to set up
- No significant legal costs
- Only one tax return required
Disadvantages
- You are personally liable for all business debts
- When you die, the business entity dies
Partnership,
Advantages
- Relatively low cost of entry
- No significant legal costs, unless a partnership agreement is required
- Income is apportioned to partners according to their share in the partnership as generally documented in the partnership agreement (this can be based not only on the share in partnership assets but also other factors such as partners’ performance in partnership business)
- No registration of name required (if trading under your own names)
Disadvantages
- Partners are personally liable for all business debts
- Partners are personally liable for debts incurred by other partners
- Potential for relationship problems
- Limited succession assistance
Company,
Advantages
- Limitation of liability
- Some tax advantages
- Ability to change ownership through trading of shares
Disadvantages
- Slightly more expensive to set up and run
- Separate tax and company returns required
- Stricter annual requirements, for example, to prepare minutes, file an annual companies return etc
- Higher establishment and ongoing costs
- It can be a lengthy process to dissolve a company
- Directors must understand and carry out their responsibilities