To operate a business, there are several commonly available entities. They are sole trader (or, sole proprietor), partnership, company, and trust. To choose which structure for your business will depend on several key factors such like:
- the nature of business you are planning to establish;
- control of the entity;
- tax considerations;
- liability considerations.
Things to consider when choosing a business structure
The nature of business will be reflected on the products or services you plan to sell, the channels through which the products or services are sold. You may ask yourself questions like:
- Do you have a single source of income, whether it provides services or manufactured goods?
- Do you plan distribution channels to get the services or manufactured goods to reach the targeted group (consumers)?
- Do you need many types of raw materials for the business? Do you need any storage space?
- Do you need many suppliers?
- Do you need to lease any property?
- Do you need any equipment?
- Do you plan to hire employees, part-time or full-time?
- Do you need coordinated, multi-channel marketing plan?
The ‘sole trader’ option might be for you
The more negative answers you have for the above questions, the more likely that a simple business structure, such as sole trader, is suitable for you.
One example is residential carpet cleaning service. It mainly serves tenants/residents in residential buildings, and provides carpet cleaning service. The owner of the business is the main service provider. The service only needs several carpet cleaning chemicals, which would be available through a single supplier. The requirement for storage space is quite moderate. The main piece of equipment needed is the carpet cleaning machine. In this situation, sole trader would be a suitable choice for the business structure.
Pros and cons of being a sole trader
The sole trader business structure has the main advantages as follows:
- it is simple to establish and terminate;
- its reporting requirement is much less than the requirement of other business structures;
- the business income is taxed at the personal rates of the owner.
Also, you need to be aware of the main risks to be a sole trader:
- you are personally liable for any liability the business incurs, including debt incurred and any other legal liabilities;
- you have very limited tax planning benefit.
Transitioning away from sole tradership
As your business grows, you may need to hire more employees, or want to control your risk to business liabilities, or have tax planning flexibility. You may start considering to form a separate legal entity, such as company.
When is the best time to make the transition, and how? The answer will depend on your actual circumstances and business plan. If you are not sure, you need to talk to your accountant and, of course, the solicitors at Foulsham & Geddes are here to guide you as you set up your business.