Sole Trader or Limited (Incorporated) Company (Part II)

The UK has four commonly used legal structures in which a company can operate. These are: sole trader, partnership, private limited company, or Limited Liability Partnership. This is a review of sole traders and partnerships.

The contents of this article is the author’s opinion and you should always obtain professional legal advice before trading. The author of this article assumes no responsibility for the advice given.

Becoming a Sole Trader
The easiest option for setting up your t-shirt company is the sole trader route. As a sole trader, minimal accounting requirements are needed and no formal company is actually created.

The trader simply notifies HMRC that they are trading within a small period of time since they started trading. The only accounting requirements are for a self-assessment tax return to HMRC for each tax year.

Operation Name
The trader is allowed to operate under their own name. They also have the option to operate under a company name of their choice. If a company name is chosen, it can be placed on marketing literature such as business cards, logo and a website. However the trader’s legal name should be included on formal documents along with the business name.

For example: John Smith t/a Acme Design (t/a is short for “trading as”)

The trader does not actually have to register the company name, however they should always check that they are not infringing on any intellectual property or registered trademarks.

Liability
Sole traders are personally liable for any company debts or legislative action against the company. It would be wise for sole traders to take copious notes and keep all documentation and receipts, in case any financial or legislative situations arise where these transactions and operations may come into question.

Creating a Partnership
Partnerships are similar to a sole trader except there is more than one business proprietor. Overall, the partners must make an agreement, detailing their rights and interests in the business. This should always be written down.

Partnership Agreements
In order to draw up a partnership agreement you can find standard templates from companies such as Simply Docs (http://simply-docs.co.uk).

After the partnership is established, each partner will submit their own separate tax return during every tax year. These documents may be reviewed for tax purposes in order to figure out the exact amount of taxes that are owed.


Setting Up a Private Limited Company
When establishing your printing company you also have the option to setup a more formal business entity called a private limited company. In order to do this, you must register with the Companies House, where companies are registered in the United Kingdom.

Advantages of a Private Limited Company
A private limited company offers a wide array of advantages when setting up your first t-shirt company. Let’s explore some of the advantages and why you might want to make the jump to this form of business entity.

  • Separate entity – TheCompany is a separate entity from the owners. It is considered an incorporated company because it is a completely separate legal entity. Therefore, the owners are somewhat protected if the company runs into debt or legal problems.
  • On behalf of the company – Anything an owner completes is done on behalf of the company. Therefore, any agreement that is signed or completed by the owner is actually between the company and the third party, as opposed to the agreement being between the owner and the third party.
  • Tax benefits – Once the company begins turning a profit, it is typically more cost effective to work as a private limited company, because of various tax benefits.
  • Professionalism – The Company looks more professional because they have Ltd in their name. For example, Acme Design Ltd. The company is easier to sell because it can be transferred to a new owner and all its contracts go with the company, as they are not connected to the owner.

The owners should always seek professional legal advice, as these matters can be more complicated in certain situations.

Warnings and Disadvantages
There are also a handful of things to be aware of when thinking about forming a Private Limited Company.

  • Company name use – The owner(s) of the company must ensure that the full company name is always included on all company literature, including the website, paper documents, email signatures and formal correspondence. Without this, customers may claim that formal, informal and verbal contracts are, in fact, with the owner and not the company. In order to protect yourself as an owner, make sure the company name is displayed everywhere. (Always include the company name, where in the UK it is registered, the registered address and the company number.)
  • Paperwork- There is typically more accounting and paperwork required when running a Private Limited Company. This will most likely cause your business costs to slightly rise.

A Private Limited Company has various advantages and disadvantages, but stay tuned for our next post on Limited Liability Partnerships and what type of entity we recommend for your new t-shirt business!

 

 

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