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Self-employment: Types of business

If you want to be self-employed, there are a number of options to choose from. Figure out which type of business is best for your idea...

What type of business can I set up?

The type of business you set up will determine the legal requirements you will have to meet. Legal requirements include the paperwork you have to fill out, the taxes you have to pay, how much profit you take and what you will lose (your responsibilities) should you make a loss in your business. A range of options exist:

Sole trader

Also known as a sole proprietor, this is the option to choose if you run your own business and you take all of the profits you make after you pay tax on them.

Although the term sole trader infers that you will be working alone, it doesn't mean that you can't employ people but rather you are solely responsible for the business. Therefore, you are responsible for any losses you make, all of the record keeping of your sales and spending and paying the bills for anything you buy for the business e.g. stock.

Partnership

When a business is owned by two or more people who are all responsible for funding the investment and start-up of the company. They are also liable for any losses the company may make.

All business profits can be shared by the partners and each partner pays tax and National Insurance on their share of the profit. A partner doesn't necessarily have to be a person it can be a limited company which counts as a 'legal person'. The company must choose a nominated partner to take responsibility for the book keeping and tax returns.

Limited company

Legally, this form of business separates the organisation and the person or people running it. Any profits made are owned by the company after it pays Corporation Tax, and the company can share its profits.

The organisation has members who own a share of the company. These shares can be sold to friends and family members. A member of a limited company is only responsible for up to the value of their investment in the business. This means that if the business runs up a lot of debt, the members aren't liable to pay the sum of the debt, just for their share of the investment.

For more information about the legal difference of these companies visit GOV.UK - Choose a Legal Structure for a New Business .

As well as the above legal forms, businesses can be set up based on different trading practices. For example:

Franchise

A franchisee will buy a license from an existing business which often means that you can use the existing business' brand, image and business model. The franchiser gets an initial (and then ongoing) fee for the franchise to use its product or service.

The business is owned and operated by the franchisee but the franchiser has control over the marketing and way that the product or service is sold. Examples of current franchises include: McDonalds, Subway, some letting agents, automotive services and many more. To find out more see the British Franchise Association (BFA) .

Cooperative

Businesses owned and run by people with the same ethos and goals.

Social enterprise

Businesses that help people, communities or charity-based organisations. Choosing this option you could run as a Community Interest Company, which is a limited company that has a community interest statement and an asset lock which is a legal promise to use the company assets for its social objectives and only give so much money to its shareholders.

Universities have started to place more emphasis on educating students about social enterprises and cooperatives.

Freelance or consultancy

You may wish to work as a freelancer or on a consultancy basis if you have skills, knowledge or a service which can be hired by companies. Commonly, this involves working from home or travelling to the different companies that hire you.

You often have to gain a great deal of experience in order to build up the reputation and networks to find frequent work. This type of work is more common in some sectors than others - see is self-employment right for you?

For finance advice, see money and tax essentials.

 
 
 
Written by Editor, Graduate Prospects
Date: 
April 2013
 
 
 

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