Sole trader

You and the business are the same person in law. It’s quick to set up, there’s little paperwork, and profits are taxed as your own income. You keep simple records, lodge one tax return, and can close the business as easily as you started it.

The catch is that the business’s debts are your debts. If a customer sues, a supplier isn’t paid or a lease goes wrong, your savings and your home can be used to pay. Insurance helps, but it won’t cover everything.

Company

A company is a separate legal person. It owns the business, signs the contracts and carries the debts, so your home is usually protected if the business fails.

It costs more to set up and to run. There are yearly filings and fees, separate bank accounts and records, and duties you take on as a director: to act honestly, to keep proper accounts, and not to keep trading if the company can’t pay its debts. Breaking those duties can make you personally liable after all.

Banks and landlords know this, and often ask the directors of small companies to sign a personal guarantee. Read any guarantee closely, because it puts your own assets back on the line for that one debt.

Three questions that decide it

Will you sign a lease or take on staff? Could a claim against you be large, for example if you give advice, build things or handle other people’s property? Will you bring in a partner or an investor, now or in the next few years?

If any answer is yes, a company is usually worth the extra cost. If every answer is no and the business is small, a sole trader may be all you need for now.

Going into business with someone

Two people can run a business as a partnership, but each partner is usually responsible for the other’s business debts. Most people sharing a business are better served by a company with a shareholders’ agreement.

That agreement settles the awkward questions while everyone is still friends: who decides what, how profits are paid, what happens if one of you wants to leave, and how a share is valued if you fall out.

Changing later

You can start as a sole trader and move into a company once the business grows. But contracts, leases, licences, insurance, bank accounts and your business name may all need to move with it, and some of them need the other side’s consent.

Planning the structure at the start is cheaper than untangling it later. In one meeting we can set out what each option would cost your business and, if a company suits, set it up with the agreements it needs.

This note is general information, not legal advice for your situation.