If you are thinking about starting your own business, or have already decided to start one, it is important to consider how you structure your business, as the structure can have a profound impact on how you conduct your business and on your tax burden.
One possible structure, and the most common for small businesses, is that of a sole trader. That is a business which is owned entirely by one (natural) person and for which there is no legal separation between the assets of the business and its owner. This can be contrasted with partnerships, which have two or more owners, but are otherwise similar, and limited liability companies, which are separate legal entities and which face additional, unique regulatory requirements. Doing business as a sole trader offers a handful of advantages and disadvantages.
The principal advantage of operating as a sole trader is its simplicity. It is the simplest type of business to set up. To set up as a sole trader, you must obtain business number, which is free, and may need to register a business name for a small fee. After that, you are in business. As a sole trader, your business’ taxes are applied to your individual tax return, making dealing with your taxes much simpler, and much cheaper (indeed, there is no legal requirement to hire accountants at all, as there is for limited companies). Of course, it is still advisable to open a sole trader bank account in order to ensure that your business’ accounting is done properly and clearly. When you operate as a sole trader, it is also easy to change the structure of your business, such as taking on partners or forming a limited company, should it become advantageous to do so.
The principal disadvantages of operating as a sole trader come from its very simplicity: the lack of separation between the owner and the business. That lack of separation means that the owner is wholly and personally responsible for any of the business’ liabilities. That means, in short, if your business borrows money, you borrow money, and are liable to pay it back, regardless of the fortunes of your business activity. This may be a problem for you if you need to raise large amounts of capital, as you cannot sell shares in a company you operate as a sole trader, only take on partners, and the company cannot issue any form of financial instruments. There is also the disadvantage that the life of the company is limited: its life ends when yours does, unlike a corporation, whose shares can be distributed to others. That is a grim subject, but an important one to consider.
The structure of your business is not a small consideration, and, though it is less interesting than thinking about the interesting work you are preparing to do, it is important. Making the right decision when you begin your business will ensure that, in the future, you can focus on what is actually important: the business you are in.