Partnership vs. Sole Trader: What’s the Difference?

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Before starting any business, you have to make some crucial decisions. One of the most critical decisions is forming a partnership or working as a sole trader. Making the right choice will pave the way for other decisions involved in your business.

Partnerships and sole traders are the two most common business entities because they are easy to form and maintain. However, both have their pros and cons. Knowing the difference can help you make a better decision. The lawyers at Wembley Solicitors, a leading law firm in the UK, have explained everything you need to know about partnership and sole trading. Keep reading to find out.

Who is a Sole Trader?

Whether you earn an income by mowing your neighbour’s law or selling your art online, you’re a sole trader. Any person who runs a business and accepts money for their goods and services is called a sole trader, self-employed or sole proprietorship.

As a sole trader, you don’t necessarily have to work alone. You can hire consultants, freelancers or staff for your business operation. Also, if someone co-owns a business with their spouse, it’s still considered a sole proprietorship.

Sole trading is the most common form of business establishment because it’s easy to start and requires minimal documentation.

What is a Partnership?

If you start a business with another party with the intent to earn a profit, you’re forming a partnership. A partnership usually starts by signing an agreement, but you can also begin by having an informal conversation and a handshake with your business partner. A business partner can be a business entity or an individual; there’s no limit to how many partners you can have.

Partnership Agreements

While partnership offers many conveniences, it’s possible to have disagreements over business decisions. To mitigate these conflicts, partners create a partnership agreement.

A partnership agreement is a document that clarifies each partner’s roles, expectations and responsibilities within the business. This agreement isn’t mandatory but helps avoid many conflicts and partnership disputes.

Differences between Sole Traders and PartnershipsOwnership

The most obvious difference between sole trader and partnership is the ownership of the business. As a sole trader, you own the business entirely by yourself, and you alone are responsible for making decisions. All the losses and profits will go to you.

In a general partnership, all parties own a specific percentage of the business. In limited partnerships, one party invests in the business, and the other runs it. Partnership terms, ownership percentages, profits and liabilities, etc., are mentioned in the contract.

Decision Making

One of the biggest advantages of sole traders is the freedom to make your own decisions. You can ask for advice from consultants and specialists, but the final decisions will be yours. Although taking business decisions can be tricky, it saves you many complications as you’re fully in charge.

Since a partnership is a shared business, the decision-making is also shared between partners. This business model allows you to view things from different perspectives, discuss the pros and cons of each decision and take a viable, collective final decision.

Liability

Every business has its own set of risks. In a sole proprietorship, you will be solely accountable for all risks. For example, if your business accrued debts, you will be personally liable to pay those debts. Most sole traders have to pay their debts from their personal savings that didn’t necessarily come from the profit of this business

In partnership, all partners are subject to personal liability. However, in a limited partnership, only those who ran the company would be liable, not the ones who just invested in the business. Forming a partnership can help you avoid (or lessen) personal liability, which isn’t the case with sole trading.

Taxes

Both partnership companies and sole traders have to pay certain taxes to the UK government each year. As a sole trader, you will file your taxes through a Self-Assessment after notifying HMRC. In Self-Assessment Tax Returns, you will need to declare your earnings of the business and claim any deductible business costs that are not part of your profitable income. It can include office supplies, employees’ salaries, business journey mileage, etc.

Limited liability partnerships aren’t taxed as a corporation, so there’s no Corporation tax. Every partner has to pay an income tax individually.

Both business entities have their pros and cons. If you can’t decide between the two or are facing complications with your business partners, get in touch with the leading lawyers in London at Wembley Solicitors. They help resolve partnership disputes, guide sole traders, and offer a wide range of legal services without hidden costs. Contact them to get started.

About the Author

The author is affiliated with Wembley Solicitors and has experience resolving partnership disputes. When not working, he enjoys playing golf, surfing and exploring new places worldwide.

The author of this post has been writing for the official website of Wembley Solicitors for a decade. He offers legal solutions to his clients for issues related to family law.