From Lawpack's Working from Home.
Starting to go self-employed is a major decision in life, and before you jump from whatever you are doing at present into self-employment, it's important to choose the right sort of surface to land on.
Sole proprietor/sole trader
The commonest sort of business is a sole proprietor. Its chief features are:
- The businessman or woman trades under his or her own name, or under a trading name.
- The trader keeps his or her own accounts or employs an accountant and submits financial accounts to HM Revenue & Customs.
- It's essentially a very simple structure to operate.
Partnership
A variation of the sole proprietorship is the partnership. If you have a spouse or friend with whom you wish to enter a business association then a partnership is the commonest sort of business structure for achieving this arrangement. In this instance you should arrange for a solicitor to draw up a partnership deed or you may decide to prepare your own using Lawpack's Business Partnership Agreement.
Not only does this legal document give a proper foundation to this business relationship, but the deed also forms part of the evidence that HM Revenue & Customs requires in order to satisfy itself that a partnership is in existence.However, beware of the pitfalls of a partnership - you may be held liable for your partner's debts. Partnerships, like marriage, are not to be entered into lightly.
Limited company
As an alternative to the first two types you might decide to form a limited company. There is one main advantage in doing this, namely that normally your liability is limited to the share capital of the company. In other words, in theory you personally cannot be made bankrupt for the actions of the company.
However, if you have given guarantees, or if you have not properly fulfilled your duties as a director, then you certainly can be made to pay for the company's debts.
If what you are going to start is only a small concern, you should not normally consider a limited company initially. If your business grows then there might be tax and other advantages from incorporation. In principle, avoid forming a limited company at the outset, because of the burdensome administration. How to set up a limited company is explained in Lawpack's Limited Company Kit.
Unincorporated association
A further structure is available where a group of individuals want to get together to form a club or organisation for some activity or other. They might consider forming an unincorporated association. Unless the business has aspirations to make a profit for its members, the surpluses will not be subject to a tax charge. However, if that organisation has spare cash which is invested or placed on deposit so that it yields income, then that income will be taxed.
The tax position of unincorporated associations should be agreed with HM Revenue & Customs at an early stage. No specific action has to be taken in order to set up an unincorporated association, but it is as well for that association to hold formal meetings and to keep proper records of the proceedings in order to protect members.
Law stated as at 1 September, 2006