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Types of employment

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Self employment and small businesses

Small business characteristics

Whether a small business is established as a sole trader, partnership or other legal format such as a limited company, working for a small firm as an employee is very different from working from a large organisation. The owner(s) will usually be working alongside their staff. Professional employees might sometimes be asked to earn part of their salary as bonuses, depending on how well the firm performs. When such arrangements work well, and the business thrives, then the financial rewards can be considerable. This type of remuneration removes some risk from the owner(s) of the business, but can mean uncertainty for staff, and is ultimately dependent on high levels of trust.

Sole Trader

What is a sole trader?

A sole trader is a business owned by one person who is legally liable for any debts incurred.

What are the advantages of a sole trader?

  • Easy to set up.
  • Enables you to keep your affairs private although you will need to inform HM Revenue & Customs regarding income tax and national insurance contributions. In addition, the details of your business bank account that you have set up, and are running your business from, will also need to be forwarded to HM Revenue & Customs.
  • Can be advantageous in terms of taxation, especially in the early days of trading, because you can offset losses against past and future taxation.
  • It is not legally necessary to pay for the services of accountants and auditors although you will probably find that it is advisable to do so.

What are the disadvantages of a sole trader?

  • The business and the owner are treated as a single entity for taxation and legal purposes. The owner is personally liable for all and any losses, without limit.
  • Many lenders will not deal with sole traders as matter of policy.
  • You will probably pay more tax in the long run when the business is established.

Ordinary Partnerships

What is an ordinary partnership?

A business with two or more partners who have joined together for the purpose of making money and who share liability for any debts incurred.

(Limited partnerships are special arrangements mainly dealing with land tenure.)

What are the advantages of ordinary partnership?

  • Can help spread the financial risk.
  • More opportunities for financial funding.
  • Partners can bring expertise or resources.

What are the disadvantages of ordinary partnership?

  • Unlimited liability as for a sole trader.
  • All partners are responsible for the acts of every partner. You could be held liable without limit for someone else's mistakes or fraudulent acts.

For this reason ordinary partnership should normally only be considered in those professions where you are not allowed to form limited companies, for example, lawyers, architects and accountants.

Limited Partnerships

What is a limited partnership?

  • A limited partnership consists of:
    • one or more general partners who are liable for all debts incurred by the business
      and
    • one or more limited partners who have contributed a sum of money or property
  • Limited partners are not liable for the debts incurred by the business except for the amount that they have contributed.
  • Limited partners may not take on a management role in the business or they will lose their protection from liability.
  • A limited partnership must be registered with the Registrar of Companies at Companies House under the Limited Partnership Act 1907.

More information is available from the Companies House website.

Limited Liability Partnerships

What is a limited liability partnership (LLP)?

This is a form of legal business entity created by the Limited Liability Partnerships Act 2000. Although it is taxed as a partnership, it is otherwise different from a limited partnership, or ordinary partnership, and more similar to a limited company.

  • Two or more people "carrying on a lawful business with a view to profit" can set up a limited liability partnership by subscribing their names to an incorporation document which must be delivered to the Registrar of Companies at Companies House together with a signed statement from the partners or their solicitor declaring that they have done so.
  • A LLP offers reduced responsibility for business debts - individual partners are not responsible for the debts incurred by the business.
  • There is a legal requirement to file an annual return with Companies House with details of the name and address of the LLP and names and addresses of members.
  • A LLP must also prepare annual accounts on the financial performance of the LLP during the year and send them to Companies House.
  • The annual return and annual accounts are public documents.

The advantages and disadvantages are similar to those of a limited company.

More information is available from the Companies House website.