Additional factors which might be considered in relation to choosing a type of business entity are security, tradition, formality and necessity.
Security and Exposure of Personal Assets
Sole traders and partnerships do not provide protection to the owners of those businesses. The liabilities and debts of the enterprise become those of the proprietor should the business be unable to discharge them at the agreed date and time.
Assets such as residential houses, cars, jewellery and other non commercial wealth can be sought by creditors to pay off business debts.
Limited companies as legally separate from their owners and therefore any debts of the business remain ring-fenced from any personal wealth the owners have.
Business Type Tradition
Certain professions have long been associated with certain types of business entities and thus customers might have come to expect a certain kind of structure within a particular industry sector.
Some examples of these are:
- Solicitors and accountants are generally partnerships
- Small painting and decorating businesses are generally sole traders
- Larger entities are generally companies
Tradition can only serve as a guide to selecting a business entity as some might argue that the old boundaries no longer exist. Smaller businesses are now becoming companies and traditional partnerships are seeking to limited their liability.
However the current landscape is looking, the tradtion might still be a significant factor in making the decision about to how to start abusiness.
Formality and Regulation for Different Types of Start-ups
Limited companies generally carry with them greater compliance and regulatory burdens compared to those of inherent in a sole trader structure.
A company must submit statutory accounts at a minimum and an audit may also be required if the business is large or is engaged in certain high risk industries.
In certain situations the type of business entity is not determined by the person becoming self-employed, but by those who will use the business' services.
This practice is common among contractors who can only gain and maintain work if they have registered as a limited company.
These contractor companies may operate as if the owners are employed the recruitment agent who hires their services. It is infact the company who employs the contractor and although owned by the contractor, is seen as a separate legal person under the law.