Sole Trader or Limited (Incorporated) Company (part I)

The UK has four commonly used legal structures by which a company can operate. These are: sole trader, partnership, private limited company, or Limited Liability Partnership.

The article should include a statement that the author assumes no responsibility for the avice given and that the reader should obtain professional legal advice before trading.

The easiest is to operate as a sole trader. In this method no formal company is set up and accounting requirements are minimal. The trader simply notifies HMRC that they are trading. This can be done in a limited time after trading has started. Accounting requirements are minimal, the trader needs only maintain adequate accounting records to complete a self assessment tax return to HMRC for each tax year. The trader can operate under their own name or under a company name of their choice. They do not need to register the company name, but should check that they do not infringe on any Intellectual Property or registered trademarks. If they use a company name then the name can be used on their business cards, logo, website etc, but formal documents should include their legal name in the format John Smith t/a Acme Design, where John Smith is replaced by their name, Acme Design their trade name, and t/a is short for trading as. Sole traders should be aware that they are personally liable for company debts and any litigative action against their company.

A partnership is much like a sole trader but where there is more than one business proprietor.  For a partnership, the partners need to have an agreement set out between them detailing their rights and interests in the company. Standard templates can be purchased from companies such as Simply Docs (http://simply-docs.co.uk). Each partner submits a tax return for each tax year, on which they are assessed for tax.

A private limited is a more formal setup where the company is registered with Companies House, the UK body where companies are registered. It gives some major advantages. Firstly, a registered company is legally seen as a separate entity from its owners (known as an incorporated company because it is a legal entity within itself, and also known as limited liability). This means that the owners have some protection if the company runs into debt or legal problems (there are exclusions to this so the reader should get professional advice). Effectively, even though the owner owns the company, anything he does is done on behalf of the company. For example, any contract that the owner signs, he is signing on behalf of the company, and therefore the contract is between the company and the second party and not the owner. Hence, if the company is closed then the contract would normally become void (again the reader needs to get advice here, because some contracts, such as those for bank loans, explicitly state that the owner becomes liable if the company fails).

To be continued…

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