There are 3 main types of legal structures that a business could operate within. Think of these structures as the building within which your business will live (speaking of structures, todays photo is of one of my favourite structures – the Brooklyn Bridge).
The 3 types of structures are sole trader, partnership and a limited liability company. Today, I’m going to talk about being a sole trader.
Imagine a little studio apartment which you are sharing with your business. There is no difference between you and your business because there are no walls in your studio.
When you are a sole trader you are operating your business without any legal separation between you and your business; in law, everything your business does is done by you personally.
Simplicity. Being a sole trader is simple as this isn’t a lot of extra administration that you need to do. This can make conducting business as a sole trader attractive.
Affordable. There are usually low to no set up costs for a sole trader.
No Legal Protection. There is no legal separation between your personal assets and your business. You are personally liable for all your business’ debts (loans, salaries, taxes, etc) and can be made personally bankrupt to pay them if the business fails.
No Tax Benefits. Sole traders pay tax on all of the business’ profits at their personal tax rate, which is often higher than the corporate tax rate for companies (at the time of writing the UK corporate rate was 20 to 23% and the top personal rate was 45%. In NZ the corporate rate was 28% and the top personal rate was 33%).
No Opportunities For Growth. Remember as a sole trader you are like that little studio apartment – there is nowhere for you to expand to. You can create a company at any time and transfer all the business’ assets and liabilities into that company. However, the further down the track this is done, the more complicated the process (and the more expensive the legal/accounting charges). In most cases the sole trader will also remain personally liable for debts and liabilities that pre-date the transfer of the business into a company.
Usually the only formal process you need to go through to operate as a sole trader is to register your business with your taxation authority for tax purposes. I say usually as you need to check the requirements in your own country.
If you are going to remain a sole trader do ensure that your contracts are water tight and that you have the insurance in place to protect yourself e.g. public liability, professional indemnity and business interruption.
I’d also suggest setting up a separate bank account for your business. It is simpler for accounting and tax purposes if they are separate.
Grab your free copy of the Legal Health workbook, designed to help you get clear on the legals you need in business, so you can begin to create a solid business foundation – and never have another sleepless night wondering if your legal ducks are in a row.
Disclaimer: This article is an educational resource designed to make you aware of some of the legal needs of your business. The information provided should be treated as a guide only and should not take the place of hiring a lawyer. Reading this article does not create a lawyer-client relationship between us. If you have a specific legal issue you need help with, you need to hire a lawyer.