Comparison of Limited Companies, Partnerships and Sole Trader Businesses
There are several types of trading vehicle which are generally available when starting business. The most common of these include a limited company, sole trader and partnership and the decision on which to choose can be influenced by many different factors.
The following table compares and demonstrates the main attributes of each business type and the different ways to start trading and served as a means to carry out a direct comparison of limited companies, partnerships and sole traders.
| Attribute | Limited Companies | Partnerships | Sole Traders |
| Personal Exposure | A company provides limited liability for the business’ shareholders. Owners of the company are required to only pay any outstanding amounts due on the shares they hold in the event that the business ceases and is unable to repay all of its debts. |
Partners share the debts of the business and as such would be required to satisfy any shortfall in assets out of their own personal funds. They do not have a shield which separates the business from the owners. |
A sole trader bears the same risks as a partnership in so as the person has personal exposure to the business debts. In the event that there is insufficient business assets to pay debts, the sole trader’s own funds could be sought to remedy the shortfall. |
| Stature | Limited companies are generally viewed as being the more robust and having a higher stature out of the three types of business. Partnerships often seen as having greater stature than a sole trader because they have at least one other person involved in the business. |
Partnerships often seen as having greater stature than a sole trader because they have at least one other person involved in the business. |
Sole traders generally are seen to have the lowest stature as they are easily set-up and usually involve just a single owner/manager. |
| Costs of Setting up | The costs of setting up a company can vary from approximately £25 to £300 depending on where the company is purchased. Online company formation agents are generally cheaper. |
There are no official costs involved in starting a partnership business, although in many cases a legal agreement may be drawn up detailing the arrangements between the partners. These can be expensive as they may require a solicitor to draft and check them in order to ensure they are valid |
Setting up as a sole trader bears no official expenses and of course there is no costs associated with any agreements between the owners. |
| Primary Set-up Organisation | All UK corporate entities are set-up by Companies House, the only body authorised to incorporate a limited company in England, Wales or Scotland. |
With partnerships, there is no incorporation process as such; neither is there a central registry containing the names of all such entities in the UK. Revenue and Customs should be notified at the inception of a partnership to ensure that the taxation affairs are maintained as required. |
Again, Revenue and Customs preside over the setting up of sole traders and should be contacted when a decision to start has been made. |
| Position in Law | Limited companies are seen as separate from the shareholders who own them and the directors who run the entities. |
Partnerships and their owners are not seen as separate in law and thus the events affecting the partnership can influence the standing of the owners of the business. |
A sole trader business and its owner are seen as the same entity and again, similar to that which exists for partnerships, the debts of the business become the debts of the owner. |