Should I stay as a sole trader or become a general partnership?

[kyla_79]

I am about to start up my own dance company with my partner. Most of the income will come from membership fees paid monthly. We are both self-employed and feel like the prospect of a partnership feels right, however, the free banks we've looked into such as Starling don't offer business accounts to partnerships. As a lot of our income will be from regularly recurring membership fees we thought it prudent to find a business account that doesn't charge for transfers in.

Are there any other reasons why it might be beneficial to become a partnership and worth paying the extra accountant and banking fees? The alternative being that we remain sole traders, the business goes in my name and my partner invoices me when it's time to split the profits.

 

[Scalloway]

An ordinary partnership is the worst business combination. You are both jointly and severally liable for all partnership debts. Also each partner has the power to contractually bind the partnership.

In other words a partnership has the greatest potential for disaster.

If you are keen to work together as a business I would form a limited company and get a competent lawyer to draw up a shareholders agreement.

 

[kyla_79]

Thanks for your response! I don't think we're ready to be a limited company yet. We're both brand new to business - experts at our craft but newbies when it comes to the business side of things. So I don't think we're ready for the responsibilities and costs of becoming a limited company. We also don't have an address as we hire a venue.

I'd love to hear what you think in response to the above but also whether if not a limited company you'd recommend we both stay as sole traders instead of forming a partnership. (And one invoice the other when it comes to sharing profits.) Thanks!

 

[Mr D]

Thanks for your response! I don't think we're ready to be a limited company yet. We're both brand new to business - experts at our craft but newbies when it comes to the business side of things. So I don't think we're ready for the responsibilities and costs of becoming a limited company. We also don't have an address as we hire a venue.

I'd love to hear what you think in response to the above but also whether if not a limited company you'd recommend we both stay as sole traders instead of forming a partnership. (And one invoice the other when it comes to sharing profits.) Thanks!

Address? You live somewhere. Home address is very common for limited companies to have registered address. The dance business if it ever gets a website will have to give an address too.

Limited company can be set up by newbies, its more expensive to run (annual accounts tend to cost more) and gives some financial protection to the people (ie you two). More protection than partnership.

Though as in anything involving more than one person - get agreements done while you are talking now. What happens if .... (insert scenario here)
One wants to leave
One wants their investment back
Both want to go in different directions
The money runs out
Can't stand the sight of each other

And so on.

The forums are littered with businesses that set up all nice and friendly, with family or best friends or husband / wife. Didn't set up any kind of agreement, didn't need it.

And some way down the line they stopped speaking to each other, each wants loads of money back out of the business (like 95% of the money each!) and the business is going to the dogs because one keeps raiding the bank account. Or one is keeping money to themselves.

 

[Scalloway]

both stay as sole traders instead of forming a partnership. (And one invoice the other when it comes to sharing profits.)

The problem I see there is the HMRC could see him as an employee if he only works with you. It would be best to speak to an accountant as they would be better placed to have an in depth look at your situation.

 

[kyla_79]

Limited company can be set up by newbies, its more expensive to run (annual accounts tend to cost more) and gives some financial protection to the people (ie you two). More protection than partnership.

Thanks, I see what you're saying! Aside from protection, with my profits being very low to start with are there any other significant advantages of forming a limited company? I've been researching it and I'm seeing a lot of intimidating cost, administration and red tape.

 

[Mr D]

Thanks, I see what you're saying! Aside from protection, with my profits being very low to start with are there any other significant advantages of forming a limited company? I've been researching it and I'm seeing a lot of intimidating cost, administration and red tape.

Its not that much extra admin or red tape.
But cost is significant. Accounts range from almost £500 to a couple of grand, depending on what you want doing and how much you do.
Plonk a big box full of mixed receipts and invoices on desk of accountant and you should expect to pay more than if you email them the correctly entered copy of accounting records.

 

[BudGC]

I'd recommend setting up as a Limited Company. Yes, the accounts will be more expensive (mine are only £600 ish inc. VAT, as I do my own book-keeping) but you can be more tax efficient by paying dividends and/or pension payments, in addition to the added legal protection. As you are not mega-busy now, in theory you have more time to get it sorted. It really isn't difficult. My business is registered at my home address, despite the fact that we have premises (a garden centre).

 

[BudGC]

P.S. Santander offer cheap-to-run business bank accounts - we pay £12.50 per month.

 

[Paul Kelly ICHYB]

The way you set up your business should be driven by what the business needs and what serves you best. As advised, a partnership may not be the best route for you to go, but maybe you should speak to an accountant for 1:1 advice.

 

[gpietersz]

We went with an LLP. Simpler than an Ltd (same tax and tax paperwork as a partnership, simple balance sheet and one other document to companies house every year) and it gives you limited liability etc.

Lots of banks will give you free banking for the first year or more and cheap after that. I think we pay £5/month and paid nothing for the first 18 months.

 

[BudGC]

We went with an LLP. Simpler than an Ltd (same tax and tax paperwork as a partnership, simple balance sheet and one other document to companies house every year) and it gives you limited liability etc.

Lots of banks will give you free banking for the first year or more and cheap after that. I think we pay £5/month and paid nothing for the first 18 months.

Who do you bank with? That's really cheap!

 

[gpietersz]

@BudGC TSB. You do pay 70p for each cash or cheque transaction. We do not use cash or cheques for business at all so it works for us.