A sole proprietorship, also known as a sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business.
The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts.
Every asset of the business is owned by the proprietor and all the business debt is theirs too.
This means the owner has no less liability than if they were acting as an individual as opposed to a business.
In short, only one person can run a sole trader business. They can choose to employ a manager to run the business, but the risks and rewards remain theirs.
Instead, it is entirely possible for two or more people to own and manage a business by means of a partnership.
>See also: Should I go sole trader, partnership or limited company?
They have to decide how to share profits or losses and how business decisions are made. Often one person looks after the finances and the other deals with sales and customer service.
They also have to decide who brings what assets or money into the business. It is usual and recommended to put these details down in a partnership agreement, so in the event of disputes the agreement outlines the procedures in how to resolve them.
Can you register a newly formed limited company as ‘dormant’ and start off as a sole trader?
It is possible to create a limited company which does not start trading immediately after it is formed and to start a business as sole trader or partnership.
However, there aren’t many reasons why you’d want to do this. After all, limited companies can be formed in 48 hours or sooner with the right help (you can buy “off-the-shelf” companies).
The taxation of a sole trader or partnership is different from a limited company. Limited companies pay corporation tax on profits, whereas a sole trader or partnership pays income tax and national insurance on profits.
Most small businesses which start as limited companies do so for tax or national insurance reasons.
Another advantage of a limited company is that you can have as many ‘owners’ as the share capital allows, so it is straightforward to create new shareholders.
More on sole traders
