OUGD502 Business Types

Following todays first Life's a Pitch session we were set research into four different types of business.

1. What is a sole trader?

Definition: A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business.

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'A sole trader is a person who sets up and owns their own business. They may decide to employ other people but they are the only owner. A sole trader has unlimited liability'

As a sole trader, your business is owned entirely by you, grown by you and ultimately succeeds or fails by you. This also means you are entitled to all profit that the business makes.

Becoming a sole trader is simple. All you have to do is register your business name and you can start trading.

There are huge incentives to becoming a sole trader but with them come terrifying or - depending on your personality - gratifying, side effects.

Some of the most famous entrepreneurs in the UK started out as sole traders. From Lord Sugar, who launched his first business with £100 selling aerials out of the back of a van, to Duncan Bannatyne, who started his entrepreneurial career with an ice cream van back in the eighties.

The benefits of being a sole trader

• Any profit after tax that the business makes is yours to keep

That's right. You are the sole owner and any money you make whether it's £10m or 10p will land squarely in your pocket.

• You have full control over your business

Forget pushy investors. As a sole trader, no one can tell you what to do. Your business and your future are in your hands. This not only makes decision making faster but also means if it goes wrong there'll be no one breathing fire down your neck. Plus you set your own targets for growth.

• Improved customer service

Sole traders can offer a more personalised approach to their customers. You are the only person the customer interacts with. This can result in strong relationships that can turn one-off customers into loyal repeat buyers of your products or services.

• Less red tape

To register yourself as a sole trader all you need to do is inform HRMC that you intend to be self-employed and you can start trading straight away.

• Accountants charge less

Accountants generally charge lower rates for sole trader accounts as there is less work for them to do. As a sole trader all you're required to complete is a profit and loss account.

• If you feel like taking a day off, you can

PR consultant Michelle Bayliss has been a sole trader for 19 years. She believes that, "Having the freedom to strike a perfect balance between work and social life is the best thing about being a sole trader."

The challenges of being a sole trader

• Liability is all yours

As a sole trader the law sees you and your business as one. This means should your business fall on hard times and find itself in debt, you as the business owner will be liable. If the business is declared bankrupt, your personal assets are on the line. This also applies if a customer sues your business. In the eyes of the law, they're suing you.

• Pressure adds up

As a sole trader responsibility for everything comes down to you. You make the decisions. The success or failure of the business rests on one person's shoulders: yours.

• You must be a self-starter

You have to do every job required from sales to web development. There's no one there to help you out when you're busy. It's down to you to stay on top of everything, which inevitably means working longer hours to make sure everything's in order.

Sole trader Jane Lee owns Dexterity.com and is a technology pr consultant. She confesses, " I can get lonely and it's hard to maintain morale when work isn't going smoothly."

• If you don't work, you don't get paid

Although you can book holidays or have a day off sick without anyone having to seek approval, it also means that your business is shut down when you do so.

How to get a grant as a sole trader

There are over 6,000 grants available for UK businesses and many of them specifically target sole traders. Grants are a great way of funding your business as they can provide capital for specific projects. Most importantly, the money doesn't have to be paid back.

Qualifying for a grant can also give banks confidence in you and your business, which could lead to extra funding.

The sole trader small print

• Remember, as a sole trader, your profits are taxed as income you must keep records showing your business income and expenses.
• You have to pay fixed-rate Class 2 National Insurance Contributions (NICs) regardless of any profits you make.
• Although, if your earnings are below £5,315 per year (2011-2012) you might not nee to pay.
• You will pay Class 4 NICs (7% on annual profits between £7,225 and £42,475 (2011-12) and 2 per cent on any profit over that amount) on any profits.
• You need to register for Self Assessment and complete a tax return each year (link to the register for self-assessment article.

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2. What is a limited company?

Definition: 

1. a private company whose owners are legally responsible for its debts only to the extent of the amount of capital they invested.

What a limited company is

A limited company is an organisation that you can set up to run your business.

It’s responsible in its own right for everything it does and its finances are separate to your personal finances.

Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits.

Ownership

Every limited company has ‘members’ - people or organisations who own shares in the company.

Directors are responsible for running the company. Directors often own shares, but they don’t have to.

Legal responsibilities

There are many legal responsibilities involved with being a director and running a limited company.

Most limited companies are ‘limited by shares’.

This means that the shareholders’ responsibilities for the company’s financial liabilities are limited to the value of shares that they own but haven’t paid for.

Example
A company limited by shares issues 100 shares valued at £1 each when it’s set up. Its 2 shareholders own 50 shares each and have both paid in full for 25 of these.

If the company goes bust, the maximum the shareholders have to pay towards its outstanding bills is £50 - the value of the remaining 25 shares that they’ve each not paid for.

Company directors aren’t personally responsible for debts the business can’t pay if it goes wrong, as long as they haven’t broken the law.

Other types of company

Most companies are private companies limited by shares. There are 3 other types.

Private company limited by guarantee

Directors or shareholders financially back the organisation up to a specific amount if things go wrong.

Private unlimited company

Directors or shareholders are liable for all debts if things go wrong.

Public limited company

Companies where shares are traded publicly on a market, like the London Stock Exchange.

How to set up a limited company

You must set up the company with Companies House and let HM Revenue and Customs (HMRC) know when the company starts business activities.

Every financial year, the company must:

• put together statutory accounts
• send Companies House an annual return
• send HMRC a Company Tax Return

The company must register for VAT if you expect its takings to be more than £81,000 a year.

If you’re a director of a limited company, you must:

• fill in a Self Assessment tax return every year
• pay tax and National Insurance through the PAYE system if the company pays you a salary

3. What is an 'ordinary' business partnership?

In a business partnership, you and your business partner (or partners) personally share responsibility for your business.

You can share all your business’ profits between the partners. Each partner pays tax on their share of the profits.

Legal responsibilities

You’re personally responsible for your share of:

• any losses your business makes
• bills for things you buy for your business, like stock or equipment
• If you don’t want to be personally responsible for a business’ losses, you can set up a limited partnership or limited liability partnership.

A partner doesn’t have to be an actual person. For example, a limited company counts as a ‘legal person’, and can also be a partner in a partnership.

How to set up as a business partnership

You must choose a ‘nominated partner’. This is the partner who will be responsible for keeping business records and managing tax returns.

Registration for the nominated partner

The nominated partner must register the partnership with HM Revenue and Customs. When they do this, they will automatically register personally for Self Assessment.

Registration for other partners

You must register for Self Assessment to pay your personal tax and National Insurance on your share of the partnership’s profit as soon as possible after you start trading.

If you register the partnership or individual partners later than 5 October in your business’ second tax year, you could be charged a penalty.

Example
If you start a partnership or become a partner during tax year 2013 to 2014, you must register before 5 October 2014.

Partnerships’ tax responsibilities

The nominated partner must:

• send a partnership Self Assessment tax return every year

All the partners must:

• send a personal Self Assessment tax return every year
• pay Income Tax on their share of the partnership’s profits
• pay National Insurance

The partnership will also have to register for VAT if you expect its takings to be more than £81,000 a year.

4. Limited partnership and limited liability partnership

Limited liability partnerships

The partners in a limited liability partnership aren’t personally liable for debts the business can’t pay. Their liability is limited to the amount of money they invest in the business.

Limited liability partnerships are most often set up by professional services firms, like solicitors or accountants.

The Companies House website has information about how to set up a limited liability partnership.

Limited partnerships

The liability for debts that can’t be paid in a limited partnerships is unequally shared by its partners. This means:

• ‘general’ partners can be personally liable for all the partnerships’ debts
• ‘limited’ partners are only liable up to the amount they initially invest in the business

The Companies House website has information about how to set up a limited partnership.

Tax for limited liability and limited partnerships

Every year, the partnership must send a partnership Self Assessment tax return to HM Revenue and Customs (HMRC).

All the partners must:

• send a personal Self Assessment tax return every year
• pay Income Tax on their share of the partnership’s profits
• pay National Insurance

You must also register the partnership for VAT if you expect your business’ takings to be more than £81,000 a year.