Part One - To limit liability or not?

Our corporate team at FDR Law, often get asked for advice on starting up a business and what format would be best to adopt.

When starting up a business the most common models adopted are:

1. Sole Trader
2. Partnership
3. Private Limited Company

As a business develops so to can its structure, for example a sole trader may become a partnership, or a private limited company can become a partnership. 

In this series we will look in brief at the essential features of each of the three common models of business structures starting with sole trader.

Sole Trader

A sole trader is a person who alone:

• Has the right to make all decisions affecting the business,
• Owns all the assets of the business,
• Is responsible for paying income tax on all the profits of the business and,
• Is responsible for the debts and obligations of the business without any limit.

You need to set up as a sole trader, if any of the following apply:

• You earned more than £1,000 from self-employment between the tax year
• Prove that you are self-employed, this could be by claiming tax-free childcare
• You want to make voluntary Class 2 national insurance payments to help you qualify for benefits

Being a sole trader is the simplest way to start a business. There are a few statutory requirements upon you. However, one of the riskiest is due to unlimited liability.

In relation to operating as a sole trader:

1. You will need an accountant to assist you with filing your self-assessment tax return each year.
2. There is no requirement to make any of your information public.
3. You don’t have to hold annual meetings.
4. You are solely liable for all debts and obligations of the business. The liability of which is unlimited. This is the biggest risk of operating as a sole trader as essentially if the business fails then you can end up personally bankrupt.
5. Allows for more flexibility.

Many people decided to set up as a sole trader alongside their full-time job. This could be setting up a business that was a hobby, doing a bit of freelancing in their spare time or even those who want to test the idea out before quitting their 9 to 5.

Sole traders are one of the most common and at the start of 2021: the UK private sector business population comprised of 3.2 million sole traders (56% of the total). With the other 2 million being actively trading companies and 384,000 ordinary partnerships (7%). (Information from The Department of Business)

If you would like more information on becoming a sole trader, please contact our Head of Corporate, Margaret Evans at Margaret.evans@fdrlaw.co.uk or call Margaret or a member of our commercial team on 01925 230000.

**This article does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest. Specialist legal advice should always be sought in any particular case.**