Choosing the right structure for your business is an important decision. If you're considering becoming a sole trader or setting up a partnership, it’s helpful to understand how they work and what each option offers. In this guide, we’ll break down the pros, cons, and key differences to help you decide which structure is best for your business.
What is a sole trader?
A sole trader is an individual who owns and runs a business on their own. It’s the simplest business structure in the UK, with minimal setup and straightforward tax responsibilities. However, one main drawback is that a sole trader bears full personal liability for business debts.
Pros and cons
| Pros ✅ | Cons ❌ |
| Registering as a sole trader with HMRC is simple and free | You're personally responsible for all business debts |
| You make all business decisions without needing to consult others | Expansion may be harder due to limited capital and resources |
| Accounting is simple, sole traders file a self-assessment tax return annually | Some clients or partners may prefer to work with reputable limited companies |
Top three advantages
Setting up as a sole trader is one of the most straightforward ways to start a business in the UK. You simply need to register with HMRC for self-assessment, and there are no fees for registration. There’s minimal paperwork, making it ideal for those who want to start quickly with little administrative burden.
As a sole trader, you make all decisions yourself - there’s no need to consult partners or shareholders. This autonomy allows you to move quickly and adapt your business strategy as needed, which can be particularly beneficial in fast-changing markets.
Sole traders only need to keep basic financial records and complete an annual self-assessment tax return. Unlike limited companies, they are not required to file detailed financial statements or pay corporation tax.
What do you need to set up as a sole trader?
There’s no requirement to register with Companies House, but you must comply with tax regulations and file an annual tax return. Setting up as a sole trader in the UK requires:
- Registering with HMRC for self-assessment to pay income tax and National Insurance
- A unique business name (optional, but it must not conflict with any registered trademarks)
- Record-keeping of business income and expenses
What is a partnership?
A partnership is a business owned and managed by two or more people who share profits, responsibilities, and liabilities. This structure is ideal for those wanting to combine skills and resources. Partnerships can be general partnerships or limited liability partnerships (LLPs).
💡Editor's insight: "I find some people get stuck on what LLPs are. In short, an LLP is just a business structure where partners' liabilities are limited to their investment. This essentially means they aren't personally responsible for the business's debts."
Pros and cons
| Pros ✅ | Cons ❌ |
| Workload, decision-making, and financial contributions are split among partners | In a general partnership, all partners are jointly and individually responsible for debts |
| Partners pool their resources, making it easier to invest in growth | Conflicts over business decisions or profit-sharing can strain relationships |
| Different skills and expertise can strengthen business operations | Profits must be divided, reducing individual earnings compared to sole traders |
Top three advantages
In a partnership, responsibilities are divided among partners, allowing for better workload distribution. Partners can specialise in different areas of the business, such as marketing, finance, or operations, improving efficiency.
Partnerships benefit from combined capital, skills, and experience. This can lead to more substantial initial investments, better decision-making, and a broader range of services or products.
Compared to sole traders, partnerships may find it easier to secure funding from banks and investors. The presence of multiple partners reduces financial risk, which can make lenders more comfortable extending credit.
What do you need to set up a partnership?
If you opt for a limited liability partnership (LLP), you must register with Companies House and follow additional legal requirements. To set up a partnership, you’ll need:
- A business partnership agreement outlining roles, profit distribution, and dispute resolution
- Registration with HMRC for self-assessment and partnership tax returns
- A unique business name (optional)
Sole trader vs partnership compared
When choosing between the two, you may want to consider factors like personal liability, control, capital needs, and your long-term business goals. Here's a quick snapshot of the key differences:
| Feature | Sole trader | Partnership |
| Ownership | Owned by one individual | Owned by two or more partners |
| Control | Full control by the sole proprietor | Shared control between partners |
| Liability | Unlimited personal liability for debts | Joint or limited liability (depending on the type of partnership) |
| Taxation | Pays income tax and National Insurance through self-assessment | Each partner pays tax on their share of profits |
| Profit retention | Sole trader keeps all profits | Profits are shared according to the partnership agreement |
| Setup complexity | Simple registration with HMRC | More complex and requires a partnership agreement |
| Decision-making | Quick, as only one person is involved | Decisions require agreement among partners |
FAQs
Does a sole trader need a memorandum of association?
No, a sole trader does not need a memorandum of association (MoA) because a sole trader is not a limited company. The same applies to a partnership business structure.
Is it better to be a sole trader or a partnership?
Choosing between a sole trader and a partnership depends on business goals. Sole traders have full control but face higher risk, while partnerships share responsibilities and resources.
What are the disadvantages of a sole trader over a partnership?
Sole traders bear unlimited liability alone. This means they risk their personal assets for business debts. They also face limited access to capital and resources compared to partnerships, where multiple owners can pool funds and skills.
What is sole proprietorship?
A sole proprietorship is a business owned and operated by one person. It's commonly used as another term for a sole trader. It's simple to establish, with minimal regulatory requirements. Sole proprietorships are common for small businesses and freelancers due to their straightforward structure and operational flexibility.
Final thoughts
Choosing between a sole trader and a partnership depends on your business ambitions, financial situation, and appetite for risk. Sole traders enjoy simplicity and full control but bear unlimited liability. On the other hand, partnerships offer shared responsibility but require careful coordination. Weigh the pros and cons of each structure to find the best fit for your business vision.
Need legal advice? Get in touch with one of our small business solicitors today for a free quote.
References
- Register as a sole trader from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant or business advisor. Bear in mind that tax rules can change and will differ based on your circumstances.