Sole Traders and Partnerships
Commonly chosen by individuals and partners for their simplicity and flexibility. Ideal for those seeking straightforward business structures with fewer regulatory requirements.
What is a Sole Trader?
A sole trader is the simplest and most common form of business ownership. It is an individual who owns and operates the business, making all decisions and retaining all profits. The sole trader is personally responsible for all aspects of the business, including debts and liabilities.
What is a Partnership?
A partnership is a business structure where two or more individuals come together to own and run a business. Partners share ownership, responsibilities, and profits. They also share liabilities, meaning each partner is personally responsible for the business’s debts and obligations.
Key Features
Ownership and Control:
Sole traders have complete control over their business decisions and operations, retaining all profits after taxes and expenses.
Partnerships involve two or more individuals who share ownership and control of the business. Decisions are made collectively, and profits are shared among partners.
Liability:
Sole traders and partners are personally liable for all business debts and obligations, meaning personal assets can be used to settle business debts.
Limited Liability Partnerships (LLPs) offer limited liability protection, where partners’ personal assets are protected.
Governance:
Sole traders make all business decisions independently.
Partnerships have a governance structure where partners collectively make decisions. LLPs must have a formal agreement outlining the roles and responsibilities of each partner.
Registration and Compliance:
Sole traders must register with HMRC for self-assessment and comply with tax regulations.
Partnerships and the individual partners must register with HMRC for self-assessment. LLPs must also register with Companies House and comply with the Companies Act 2006. Accurate financial records must be maintained, and tax regulations must be followed.
Reporting requirements:
Making Tax Digital: From as early as April 2026, individuals with qualifying turnover (not profits) more than £50,000 from rental or self-employment combined will be required to report quarterly to HMRC under Making Tax Digital (MTD) using compatible software. Qualifying earnings are inclusive of self-employed income and rental income. From April 2027, the income threshold reduces to £30,000 for reporting requirements. Partnerships income is not currently included within MTD.
Declaring Business Income: Report all business income on your tax return (or quarterly if qualifying for MTD), including sales, services, and other revenue.
Deducting Allowable Expenses: Deduct expenses like office supplies, travel costs, marketing, professional fees, and utility bills.
Keeping Accurate Records: Maintain detailed records of all income and expenses, including receipts, invoices, and bank statements.
Thresholds for Reporting: If your overall earnings are more than the personal allowance (£12,570) any trade income will likely require reporting on a self-assessment tax return. However, if your trading income is below the trading allowance of £1,000 this may not apply to you.
Entitlement to Final Funds:
In the event of winding up, sole traders and partnerships must settle all debts and liabilities. Any remaining funds are distributed to the owner(s).
LLPs must follow specific regulations regarding the distribution of remaining assets, ensuring compliance with legal requirements.
Taxation:
Sole traders and partnerships are taxed on their business profits through self-assessment. They must register with HMRC and submit annual tax returns. They are also responsible for National Insurance contributions.
Both sole traders and partnerships must register for VAT if their taxable turnover exceeds the VAT threshold and if they employ staff, they must operate PAYE (Pay As You Earn) as part of their payroll.
Benefits
Simplicity and Ease of Setup:
Setting up as a sole trader or partnership involves minimal paperwork and lower costs compared to a limited company.
Control and Flexibility:
Sole traders and partners have complete control over business decisions and operations, allowing for quick decision-making and adaptability.
Greater Privacy:
Financial details do not need to be disclosed publicly, ensuring greater privacy for business owners.
Lower Administrative Burden:
These structures have fewer regulatory requirements and administrative burdens, making them cost-effective and straightforward to manage.
At Green Accountancy we specialise in working with social enterprises under most structures. Our key services encompass Company Accounts and Tax, VAT, Management Accounts, and Payroll. Our mission is to support purpose-driven entities in maintaining well-managed finances, making us an ideal partner for the unique needs of social enterprises. To find out more, do book a free online meeting.
