There are several options if you want to become self-employed, with the type of business that you start affecting your legal responsibilities
Each differs in terms of: the paperwork you must complete; the taxes you must pay; the way in which profit is distributed; and your personal responsibilities if the business makes a loss.
These are owned and managed by one individual. There's no legal distinction between the proprietor and the company, meaning that all debts and after-tax profits are personally yours ('unlimited liability'). You can employ staff, but you'll keep the day-to-day financial records before handing responsibility for the end-of-year accounts to your accountant.
Sole traders are usually easily established, have low running costs, are subject to fewer regulations and are easy to discontinue. However, they can be difficult to keep afloat, and you'll probably work long hours and take few holidays. There's nobody to share responsibility with either, meaning that any business weaknesses are exploited. Specialist service providers such as plumbers, hairdressers and electricians are often sole traders.
Similar to sole traders, these involve two or more people pooling their expertise to own and manage the business. Partnerships have unlimited liability, while a deed of partnership usually states how much capital each individual has contributed, how profits and losses are to be shared, and who is the nominated partner tasked with bookkeeping. Each partner pays tax and National Insurance on their individual profit.
Partnerships usually offer shared responsibility, reduced time pressure on individuals, and increased financial clout and specialisation. However, decision-making can be difficult, while one partner may feel that another isn't putting in sufficient effort or reaping disproportionate profit. Professional service providers such as dentists, doctors and accountants are often partnerships.
Unlike sole traders and partnerships, these businesses are registered at Companies House and have their own legal rights and obligations. There are two types of limited company: private limited companies are often small businesses that don't trade on the stock exchange, while public limited companies are usually well-known businesses that do.
For both, ownership is divided into equal parts called shares; whoever owns one or more of these is a shareholder. They offer limited liability; this means that the business, not the owners or managers, enters into contracts, employs people, takes debts and profits, and is liable to prosecution if criminal offences are committed. In fact, owners aren't necessarily involved in running the business unless elected to the Board of Directors.
These are established businesses that are owned by a franchisor but managed by a franchisee. The franchisor sells the right to use their business model to the franchisee, who pays an initial and ongoing fee. McDonald's, KFC and Hertz are three huge franchises.
Workload and start-up costs are usually lower, as the ideas, brand and operating technique is tried and tested. Business finance is therefore more easily acquired, while there are existing relationships with suppliers, distributors and marketers. Franchisees make good money quickly, but constantly high fees restrict long-term profits. Furthermore, cheaper operating methods cannot be used unless sanctioned by the franchisor. Another negative is that fellow franchisees may damage the reputation of your business.
Many types of social enterprise exist; however, all are operated to benefit society or the environment, and must transparently reinvest profits to achieve their objectives. They can be founded as a sole trader, partnership, limited company, mutual, charitable incorporated organisation (CIO) or community interest company (CIC). Types of social enterprise include:
- credit unions;
- development trusts;
- employee-owned businesses;
- housing associations;
- trading arms of charities.
There are around 70,000 social enterprises in the UK, employing almost one million people and contributing £18.5billion towards the economy. Examples include The Big Issue Foundation and the Eden Project.
These social enterprises aim to create customer value, not shareholder profit. They're owned and managed by those who work in it, who have the same goals and ethos. They act together to meet the needs of the cooperative's members, sharing ownership and making decisions democratically. The Co-operative Group is one of the world's largest cooperatives.
Established for charitable purposes only, these differ from social enterprises as income is through grants and donations rather than trade. They pay reduced business rates and receive tax breaks, but must obey charity law that demands complete transparency. They are normally run by trustees who don't benefit from the charity.
Freelance or consultancy
These are individuals who have enough skills, knowledge and experience in a certain field to be casually hired by companies. This often involves working from home rather than travelling to the different organisations that hire you. You could register as a sole trader or a limited company.
Popular jobs for self-employment
The most common jobs for self-employment - particularly freelance or consultancy work - are in the arts and humanities field. They include:
- broadcast presenter;
- fine artist;
- production designer;
- television camera operator.
The most common sectors for self-employment are:
- accountancy, banking and finance;
- creative arts and design;
- information technology;
- leisure, sport and tourism;
- media and internet.