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Home Working: Drawbacks and Advantages of Different Business Types

By: Garry Pierrepont - Updated: 20 Oct 2012 | comments*Discuss
Advantages Drawbacks Sole Trader

The main options available if you're considering setting up your own business are: sole trader, partnership or limited company. Before deciding the best option for you, consider both the advantages and drawbacks of each.

Sole trader

If you plan to own your business by yourself, you are most likely considering the sole trader option. This is the most common type of business ownership in the UK, and you can have as many employees as you wish.
Sole Trader Advantages
The key advantage of becoming a sole trader is that you have complete control of your business. For many people, owning their own business stems from a desire to ‘be their own boss’ and the freedom of choice that comes with this is a major plus. You are also entitled to keep all the profit once the company starts making money.

In addition, sole trader organisations are very easy to set up as you only need to open a suitable bank account and inform HMRC. After that, it is simply a case of filling out the relevant forms. As a sole trader, you will not be obliged to publish your business activity records – earnings are private so competitors will find it difficult to glean any information about the way you operate.

While the advantages are plentiful, it is important not to get carried away and forget about the drawbacks.

Sole Trader Drawbacks
Firstly, when getting started it can be difficult to secure finance because your business is small. As a sole trader, you might find banks are the only long-term finance option so funding is very limited. Depending on your type of business, as a sole trader you might find it difficult to take advantage of economies of scale, as you are less likely to be able to buy in bulk. Another key thing to think about is what happens if you, as the owner die – the matter of continuity can be very complex if no one else holds legal rights to the business.

But a major risk that comes with being a sole trader is that you are liable for all debts that the business racks up, including all personal money that has been invested.

Partnership – overview

A partnership is a business that is owned by two or more people, and everyone involved has equal responsibility for the company.A positive reasons for forming a partnership is the fact that it is very cost effective in terms of people investment – a business that is made up of people with different skills can be very complementary – allowing each person to specialise.

On the emotional side of running a business, it is highly beneficial to have support from someone else involved, particularly when times are tough. Running a business requires a great deal of organisation; having more than one person to muck in often results in better systems being put in place.

Of course, it is not all beneficial – remember that more than one person means more than one set of objectives and ideas. Over time, expectations can change – and if you fall out with your partner the situation can produce serious financial consequences.

In a partnership, you can’t make decisions alone, which can often feel as though you are working for someone else. A greater degree of flexibility is required than as a sole trader. Financially, all partners are required to make up the debts of the business – if your partner makes a mistake you are still liable – and if they fail to pay, you will have to. Likewise, you have to share profit with all partners, no matter how many hours each has worked.

Limited Company

The main advantage of creating a limited company is that the business remains separate from its management, and therefore the liability of the members (shareholders) is not as great. A limited company also has greater financial options available when it comes to borrowing.

A limited company has its name protected, and in the event of one of the management or shareholders becoming bankrupt, resigning or dying, the business can still continue. Recruitment for the board is fairly straightforward, and not limited to the founders of the company – therefore the members can be changed.

There are a number of other commercial benefits to a limited company, including benefits to employees and bonuses to board members, all of which need to be weighed up carefully before you decide on the right business type for your situation.

The main drawback to a limited company is the scale of the venture. They take time to set up as more people are involved, and require a more structured proposal – you need to be able to persuade the necessary people to support you.

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