Sole trader
If you’re a sole trader, you run your own business as an individual and are self-employed.
You can keep all your business’s profits after you’ve paid tax on them. You’re personally responsible for any losses your business makes. You must also follow certain rules on running and naming your business.
You need to set up as a sole trader if any of the following apply:
- you earned more than £1,000 from self-employment between 6 April 2019 and 5 April 2020
- you need to prove you’re self-employed, for example, to claim Tax-Free Childcare
- you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits
To set up as a sole trader, you need to tell HMRC that you pay tax through Self Assessment. You’ll need to file a tax return every year.
As a sole trader, you will need to:
- keep records of your business’s sales and expenses
- send a Self Assessment tax return every year
- pay Income Tax on your profits and Class 2 and Class 4 National Insurance
You must register for VAT if your turnover is over £85,000.
https://www.gov.uk/set-up-business
Limited company
A limited company is a company ‘limited by shares’ or ‘limited by guarantee’.
Limited by shares companies are usually businesses that make a profit. This means the company:
- is legally separate from the people who run it
- has separate finances from your personal ones
- has shares and shareholders
- can keep any profits it makes after paying tax
Limited by guarantee companies are usually ‘not for profit’. This means the company:
- is legally separate from the people who run it
- has separate finances from your personal ones
- has guarantors and a ‘guaranteed amount’
- invests profits it makes back into the company
Partnership
In a partnership, you and your partner (or partners) personally share responsibility for your business. This includes:
- any losses your business makes
- bills for things you buy for your business, like stock or equipment
Partners share the business’s profits, and each partner pays tax on their share.
A partner does not have to be an actual person. For example, a limited company counts as a ‘legal person’ and can also be a partner.
When you set up a business partnership you need to:
- choose a name
- choose a ‘nominated partner’
- register with HM Revenue and Customs (HMRC)
The ‘nominated partner’ is responsible for managing the partnership’s tax returns and keeping business records.