Choosing which business model is right for you

Sole trader, partnership, limited liability partnership, or limited company – before you start your business, you’ll need to choose a business model.

But which do you choose?

There are benefits and disadvantages to each. Each one is appropriate for different business types, and choosing the right one for your business can be a huge factor in how your business performs – so it’s important to get right from the start.

But if you haven’t a clue, this guide will help you understand their key features and how each one works.

 

What’s a sole trader business?

 

A sole trader is the sole owner of the business and owns the assets of the business in their own right.

Examples of a sole trader:

• Evan, the coffee shop owner
• Doris, the dog-walker
• Anna, a corner shop owner
• Catherine, a graphic designer.

Any legal responsibilities?

A sole trader’s legal responsibilities include paying income tax and social insurance contributions and complying with any relevant regulations (for example, complying with data protection or food safety laws).

Who’s the key decision maker?

The sole trader manages the business and makes the key decisions within the business.

They may decide to hire a consultant to help them make business decisions; however, it is them, the sole trader themselves, that has final say over how the business is run.

Who’s liable for debts?

If the business incurs any debts at all, it’s the sole trader themselves who are responsible, or liable, to pay them.

How’s finance typically offered?

Because of the personal liability for any debts in this arrangement, it’s often not easy to get finance as a sole trader.

Some businesses may be able to obtain grants or awards, but the amounts tend to be relatively small.

The most common means of obtaining extra funds is generally by way of a bank overdraft and, for larger sums, bank loans.

These can be provided on quite inflexible terms and often require security in the form of a fixed charge over an asset owned by a sole trader or the use of a personal guarantee.

So, there can be a fair amount of risk involved in taking on financing commitments.

What details need to be public?

A sole trader’s name and business address must be visible on business letters, invoices, receipts, payment demands and written orders.

 

Advantages of being a sole trader

 

• The sole trader’s decision-making ability isn’t diluted or affected by anyone else.
• No setup costs (i.e. there’s no company formation fee to pay), and there aren’t any ongoing associated fees such as filing of annual returns, bookkeeping.
• A sole trader doesn’t have to prepare formal annual accounts like a limited company has to. This keeps their accounts private rather than public. A sole trader just needs to submit a tax return once a year.

 

Disadvantages of being a sole trader

 

• The business debts fall entirely on the sole trader personally, so their personal assets and possessions are potentially at risk.
• It’s not easy to get finance as a sole trader.
• Because of the personal liability, some customers or companies don’t like trading with a sole trader and prefer working with a limited company.
• You’re likely to pay more personal tax as a sole trader than as a limited company.

 

How do you set up as a sole trader business?

 

This is the simplest of all the options and it’s a very common route for people just starting out.

All you need to do is register yourself for self-assessment with the Revenue.

You may also need to register your business name with the Companies Registration Office (CRO).

If this model’s right for you – here’s our guide to setting up as a sole trader (coming soon)

 

What’s a general partnership?

 

A general partnership is quite similar to a sole trader arrangement – but in this model, 2 or more people own the business and the assets, and they have a share in all profits and financial and legal liabilities of the business.

Examples of a partnership:

• John Reid and Paula Reid, trading in partnership as Reid’s Pharmacy
• Lauren, Sharon and Peter, running an accountancy business.
• Sean Hughes and Jane Phillips, making and selling jewellery.
• Conor Mahon and his pal Jeff Reilly, trading as builders.

Any legal responsibilities?

As with a sole trader, the partners are taxed directly.

Partners also need to comply with any relevant regulations (for example complying with data protection regulations or food safety laws).

Who’s the key decision maker?

The partners manage the day-to-day running of the business.

Decisions are typically made on the simple majority vote of the partners.

However, adding new partners, adapting the partnership business or any responsibilities delegated by the partners to a particular partner or group of partners generally requires the agreement of all the partners.

If necessary, specific decision-making duties can also be shared out between the partners and detailed within a partnership agreement.

Who’s liable for debts?

In a general partnership, the partners are jointly and individually liable for the debts of the business.

A partner can be individually liable for a debt if they act outside their authority.

In that case, the debt wouldn’t be treated as a debt of the business and the other partner(s) would not be legally responsible for that debt.

How’s finance typically offered?

Partnerships face a similar position to sole traders, also retaining very little control over assets that may be being used as security for a loan.

What details need to be public?

All partners’ names and addresses must be available for inspection at the main trading premises of the partnership as well as be visible on business letters, invoices, receipts, payment demands and written orders.

 

Advantages of a general partnership

 

• Working alongside business partners could enable you to explore new business ideas more efficiently and creatively than working alone.
• Similar to a sole trader business, the set-up costs are low and there’s less ongoing admin to do – for example, unlike a limited company, you won’t need to provide financial accounts to Companies House.
• You may have greater capacity to borrow and more capital available with more than one person involved.
• As with a sole trader business, your financial position is private and not publicly available on the Companies House website.
• You can set out clearly any asset distribution between the partners in a partnership agreement.

 

Disadvantages of a general partnership

 

• As with a sole trader business model, the liability of the partners for the debts of the business is unlimited.
• Each partner is jointly and individually liable for the partnership’s debts. Any partner can be sued for the entirety of a partnership’s business debts.
• There’s potential for disputes and conflict among the partners, and decisions affecting the partnership could be difficult to agree on.
• If partners join or leave, you may have to value all the partnership assets, and this could put the partnership at risk if the partner who’s leaving contributed significantly.

 

How do you set up a general partnership?

 

You’ll need to register with Revenue for self-assessment.

While not compulsory, it’s a very good idea to also draw up an agreement between the partners.

There’s no legal requirement to have a general partnership agreement, but we strongly recommend it.

A partnership agreement clarifies how the partners work with each other, and it also shows how they share the profits and the risks within the partnership.

In the absence of any expressly agreed partnership agreement the law would make a legally binding assumption that the partners share the profits (and losses) equally.

If you believe this model’s right for you – here’s our guide to setting up as a general partnership (coming soon)  

 

What’s a limited company?

 

Unlike a sole trader or a general partnership arrangement, a limited company has its own legal identity, separate from the identity of the owner.

In this model, the company owns the assets of the business, and the shareholders own the company.

(The shareholders are often the person who founded the company and/or people who are given a share of the company by the founder, e.g. investors or employees).

Examples of a limited company:

• Top Training Ltd, a personal training company
• Hayley Jones Photography, a freelance photographer’s company
• Belle’s Books Ltd, a bookshop
• Amy Smith Designs, an artist’s company

Any legal responsibilities?

Legal responsibilities of a limited company include filing an annual confirmation statement stating that information held about the company is up to date; maintaining a statutory register (for directors and shareholders); and keeping board minutes, resolutions passed by the shareholders and financial accounts.

Directors (there has to be at least one) also have specific legal responsibilities.

This guide to a limited company director’s duties and liabilities (coming soon) explains what you’d need to consider.

Who’s the key decision maker?

A limited company must have at least one director (and in companies just starting out, this is the founder).

And it’s the director/s that manage the day to date running of the business.

Who’s liable for debts?

The company.

A shareholder can generally only lose the value of their share/s and has no liability once they have paid for their share/s.

Directors can face legal action but only if they’ve engaged in wrongful trading or have breached their duties to act in the best interests of the company.

The shareholder’s liability is limited to their individual investment, so (unlike with a sole trader or a general partnership), it’s the company that would be liable for any debts the business accrues rather than the business owner or the shareholders being personally liable.

How’s finance typically offered?

Limited companies have the greatest flexibility to take on finance and raise funds.

This is because they can sell shares to gain investment.

What details need to be public?

The company’s name, place of registration, registered number, registered office address and limited company status must be visible on all official company material.

The details of the directors and shareholders, financial accounts and charges should also be on the statutory registers.

 

Advantages of a limited company

 

• The person who founded the business and all subsequent investors aren’t personally liable for the debts of the business. So this means personal assets and possessions aren’t likely to be at risk.
• It’s easier to get investment in your business because you can sell shares in your business to anyone who’d like to invest relatively easily.
• It can look more professional operating through a limited company than as a sole trader, for example, and other businesses and individuals often prefer operating with a limited company rather than a sole trader.
• There could be better tax advantages than operating as a sole trader.

 

Disadvantages of a limited company

 

• There are obligatory tasks (as mentioned above in the legal responsibilities section) such as filing company accounts. This means that accountancy fees or accountancy software could be necessary.
• You have less privacy than operating as a sole trader, as your company accounts and confirmation statements are publicly available from the CRO.
• Because the assets belong to the company, and not the individuals within the business, you can’t withdraw money freely from the business in the same way a sole trader can. The company would need instead to pay you a salary or pay dividends on the shares (if there’s been a profit).

 

How do you set up as a limited company?

 

You do this by registering your company with the CRO.

You can register your limited company on the CRO website.

You can set up quite quickly and for as little as €50 if your business model is quite simple.

If this model’s right for you – here’s our guide to setting up a limited company (coming soon)

 

What’s a limited liability partnership (LLP)?

 

A limited liability partnership (LLP) is essentially a hybrid structure between a general partnership and a limited company.

It’s recognised as a legal entity in its own right with a recognised legal structure, just like a company – and it’s intended for use by businesses that would normally operate as a partnership.

Like with the limited company model, the LLP is seen as a separate legal entity from the people that own and operate the business.

So, it’s the LLP that owns the business assets.

This business model typically brings together groups of experts or professionals, and where liability is an issue – for example, dentists, vets, lawyers, architects and accountants.

Examples of a limited liability partnership (LLP):

• Tuff and Jones Vets LLP
• Super-Duper Dentistry LLP
• Bolt and Williamson Financial Consultancy LLP
• Houseproud Architecture LLP

Any legal responsibilities?

Smaller LLPs can be excused from some legal duties but, in general, LLPs need to file confirmation statements and accounts, and announce member changes with Companies House in a similar way to a limited company.

Who’s the key decision maker?

All the members manage the business, but generally some members will be assigned particular responsibilities.

Specific decision-making duties tend to be shared out and detailed within a member’s agreement.

Who’s liable for debts?

Like with a limited company, generally any claim would be against the LLP.

In an LLP, each partner is not responsible or liable for another partner’s misconduct or negligence.

How’s finance typically offered?

Lenders often require personal guarantees and financial contributions from the partners.

Those loans may well need security over assets owned by the LLP.

What details need to be public?

The name of the LLP, place of registration, registered number, registered office address and annual accounts must be visible on all official material, such as letterheads, and in published reports.

The names of all of the partners should also be included on all official paperwork such as invoices and letters.

The registered company address should also displace the name of the LLP.

 

Advantages of a limited liability partnership

 

• The individual partner/s aren’t liable for the actions for another partner in the partnership.
• Ordinally, a partner’s liability is limited to what they put into the partnership.
• An LLP doesn’t have to hold board meetings (or the equivalent of shareholder ones).

 

Disadvantages of a limited liability partnership

 

• There are more admin tasks required in a limited liability partnership than in a general partnership arrangement.
• LLPs need to file confirmation statements and accounts and announce member changes with the CRO in a similar way to a limited company.

 

How do you set up a limited liability partnership (LLP)?

 

At least 2 people are required to form an LLP, and you must be running a business (not a charity, for which different rules apply).

To register an LLP, you need to file a form with Companies House and pay a fee.

If you believe this model’s right for you – here’s our guide to setting up a limited liability partnership (LLP) (coming soon).

Now you have a better understanding of the different business models, hopefully you now know which one is for you… and the next step is to get yours set up!

We have guides for setting up each type of business model (as linked in the relevant sections above and you’ll also find others in this Hub).