Different types of business ownership explained

Are you a Sole trader? Limited company? Partnership? No idea? There are a number of different business ownership types and it isn’t always easy to figure out which one is right for your company. We’ve broken each one down to try and help.

3 min read

In the UK there are a number of different types of business ownership structures that you could fall under. We’ve broken them down so that you can see which is right for you and your business. 

Sole traders 

To be classed as a sole trader, you need to run your own business as an individual and be classed as self-employed. 

As a sole trader, you can keep all the profits your business makes, once you’ve paid tax on them, but you’re also legally liable for any losses your business makes. 

To set yourself up as a sole trader you must: 

  • Have earned more than £1,000 from self-employment in the last tax year

  • Be able to prove you’re self-employed 

  • Want to make voluntary Class 2 National Insurance payments to help you qualify for benefits

Partnership 

Think of doctor’s surgeries, solicitors, hairdressers and the likes. Companies where you have a group of skilled people who band together to start their own business or practice. 

When you set up a partnership, there is generally a document called ‘Deed of Partnership’ that is put together to show how much each person has invested, how any profits or losses will be split and who from the partnership is responsible for things like bookkeeping etc. 

In a partnership there is the added help in decision making, splitting the workload and sharing a number of other day-to-day tasks. Each partner must also pay tax and NI on their individual split of profit.

Limited company 

A limited company differs from a sole trader or partnership as it is owned by the shareholders and run by appointed directors. 

The limited company must be registered with Companies House and is classed as its own legal entity. This means that the company's finances and legalities are separate to that of the owners. Any profit made is the property of the company (after any taxes are paid) and only then can they be paid out to shareholders. 

You can either be a limited company by shares or by guarantee. To be ‘limited by shares’ means that as a business, you generally make a profit and that the company: 

  • Is legally separate from the people that own it 

  • Has separate finances from the owner’s private finances 

  • Has shares and shareholders 

  • Is entitled to keep any profit it makes after-tax

To be ‘limited by guarantee’ means that generally, the business is not for profit and the company:

  • Is separate from the people that own it

  • Has separate finances from the owner’s private finances 

  • Has guarantors and a ‘guaranteed amount’ 

  • Invests any profit back into the business

Franchise

Becoming a franchise is to join an already established company. It’s most common in the likes of fast food/restaurants whereby the main company (franchiser) sells the rights to use their branding and business model to a franchisee for an ongoing price. 

It is an easier way of starting a business as you are given all the tools needed to get up and running (suppliers, equipment etc.) but it does come with restrictions. As part of a franchise, you might be required to turn over a proportion of profits to the franchiser and may be tied into using certain suppliers.

Freelancer

The gig economy. Another form of self-employment. Freelancers tend to be people highly skilled in their chosen area who don’t want to take on a permanent full-time role, for whatever reason. 

Being a freelancer gives you the freedom to choose when and who you work for, but also set their work rates. Freelancing has been a more common type of work for a number of industries over the last few years and doesn’t seem to be slowing. 

As a freelancer, you have the ability to work across several projects at any given time, compared with contractors who will commit to a fixed-term at one job/project before moving on to another. 

Social enterprise 

A business set up with the goal of helping society or the environment. A social enterprise must be seen to return its profits into causes that help attain its objectives of social change. There are several types of social enterprise that can be set up, such as;

  • Development trusts

  • Cooperatives 

  • Credit unions 

  • Housing associations

So, now do you know if you’re a sole trader, a partnership or a limited company? Hopefully, this has helped you make that first step into launching your own business and being one step closer to realising your dream. 

Now that you know what type of business you fall under and would like to find out more about a Mettle business account, you can do so here

You might also like

5 min read

3 min read

The Mettle account is an e-money account provided by Prepay Solutions (PPS), a trading name of Prepay Technologies Ltd which is an electronic money institution authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 (FRN 900010) for the issuing of electronic money. Mastercard® is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated. Registered office: 250 Bishopsgate, London, United Kingdom EC2M 4AA

Copyright 2020 © Mettle Ventures Limited.

NatWest