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Sole Trader, Limited Company or Partnership?

By: Rachel Newcombe - Updated: 16 Oct 2012 | comments*Discuss
Partnership Sole Trader Partnership

Once you’ve decided on what your business is and what you want to do, you need to decide on what your business status will be. Three of the main options are running your business as a sole trader, a limited company or a partnership. Here’s a run down of what each involves and means to you.

Sole Trader

Working as a sole trader means just what the name suggests – you’re a one man, or woman, business working on your own. Opting to be a sole trader has many advantages and is the route that a large number of new businesses take each year.

To be a sole trader, you don’t have to pay any registration fees and you get to keep all the profits you make. Record keeping should be relatively simple and straightforward, you’re in charge of making all the key decisions and it can be a good way to go about testing a market and ascertaining whether it’s viable. If you choose this route, you need to register as self-employer and complete annual self-assessment tax returns for HM Revenue and Customs.

The main downside of operating as a sole trader is that the distinction between your business and you as an individual can become blurred. If the worst happens and your business fails, you’re personally liable to pay for the failure and all the costs involved out of your own pocket. If there’s a lot of money invested in your business, this could be drastic.

Limited Company

If you choose to opt for setting up a limited company, by law you need to have at least one director and a company secretary. You need a company name and a UK address in order to set up a limited company and you need to register with Companies House.

Compared to a sole trader, the main advantage is that, if the business fails, you’re less at risk, as the business is regarded as separate to your personal life. However, it can be more time-consuming to run, as there’s lots of paperwork to complete and you’ll have to complete an annual return for Companies House each year. Also, your business affairs are less private, as anyone can request details of your company accounts from Companies House, which may not appeal to everyone. In addition, there’s an annual tax to pay to Companies House, called Corporation Tax.


A partnership is where you form a business with one or more other people. Each partner has a share in the business, which may vary according to how much financial investment or time they put in, and each takes a share of the profits. It can be a good option if there are people you know well and trust and want to work with, although it’s possible to have sleeping partners, who invest money, but aren’t involved in running the business.

In order to form a partnership, each partner needs to register as being self-employed. The partnership as a whole, plus each individual, then has to fill in annual self-assessment tax returns each year.

In a similar way to sole traders, the downside of a partnership is that there’s no protection if a business fails. Also, if one partner resigns, dies or becomes bankrupt, the partnership has to be dissolved, although the business can continue as normal.

Seeking Advice

If you’re not sure which of the business status options is the most applicable for you, then take advantage of the services on offer at business centres and seek further advice on which one would be most appropriate for your craft business needs.

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